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Understand How To Find The Trend And Make Trading Easier

October 12th, 2009 · No Comments · Finance

A funny thing happens when you put up a price chart and ask people to define what the trend is.  Even when its completely obvious to someone like me, as in not any question at all, you will still get many different answers based on the exact same chart.This results from people not knowing how to find a trend on a price chart with any speed or accuracy.  It is actually quite simple, and is a key thing to know if you want to learn to trade.

The first thing to do is to size the chart properly.There is no real point in loading 5 years of data on a stock you plan to day trade and hold for a mere 5 minutes.  So here is a guide for what you need as far as time loaded on a chart:

Daytrade:

  1. 1 min chart:  Have at least 2 hours of data (120 bars) on the screen but no more than 6 hours (1 full day).
  2. 2 to 5 min chart: Make sure you have at least 3 hours of data up, but no more than 2 days.
  3. 10-15 min chart:  Have at least 3 days of data up, but no more than 1 week.

Swing Trades (longer term hold) you will want a 10 to 30 minute chart up and you will want at least 10 days of data up on the screen.

You will want to make sure you are using a “bar chart” style of chart, and not “candlestick” or other types.This makes it much easier to identify the trend.  Start by identifying every single  V  bottom area.  Anytime there is a low with a V bounce, make note of it.Additionally, look for / top areas where the price spikes up and then sells off sharply.  Concentrate on the major ones (meaning it makes a significant move away from that area in a short time).  Next, get your drawing tool and connect the V to each other V.Connect the / to each other /.Connect the low areas on the V, and then the highs of the /.  Again, this is a key to learn how to trade.

Lines that slope up to the upper right corner mean the stock is currently in an uptrend.  Lines that slope from the upper left down to the right means the stock is in a downtrend.Another easy method: Go to the first bar on the left, and then to the very last price on the right hand side.Draw a straight line going in between the two.if the line is pointing upward – this is an uptrend.if the line is sloping down to the right, then the trend is a downtrend.Another key aspect to notice is the oscillations around a central trendline.Does it go up and down 2pts, up and down 1pt, up and down .50 etc – remember, all that is needed is a rough average, not an exact number.This is how you can tell in general the strength of the trend.The lower the general oscillation in price, the stronger the trend is.The thinking here is that the price hardly oscillates because the buyers in an uptrend chase is up and bid, and the sellers in a downtrend chase it down and offer so it does not really counter move much.

Another thing to keep in mind the more you practice, the faster it gets – the lines are no longer necessary.I can glance at a chart and know the trend and approximate strength within seconds.  In addition, you will always want to know the trend on the next higher timeframe than you are trading.  For example, on a 5 minute chart the trend might be up, but on a 15 minute chart it is still down.This needs to be focused on, because a longer term trend can often pull the shorter term trend back in line.Overall, you want your higher term chart to be a time multiple of about 3 from the chart you intend to trade.  So if you are on a 1 min chart, you watch the 3 min chart also, if on a 5 min chart, you watch the 15 min chart.  Once you can easily tell the trend of any chart, other aspects of learning to trade become much easier.

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