How To Find The Trend On A Chart
A funny thing happens when you put up a price chart and ask people to define what the trend is.Even when it seems completely obvious without question, you still will get many different answers to the same chart which should not happen.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 min chart: Have at least 2 hours of data (120 bars) on the screen but no more than 6 hours (1 full day).
- 2 to 5 min chart: Make sure you have at least 3 hours of data up, but no more than 2 days.
- 10-15 min chart: Have at least 3 days of data up, but no more than 1 week.
For swing trades, which are a longer term hold, you will want a 10 to 30 minute chart on your screen, and additionally about 10 days of data.
Once you have the data up on the screen, make sure you are looking at a "bar chart" and not a "candlestick chart". This is easier to see 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.Focus in on the major ones where it moves significantly away from that area in a short period of time.Next you will want to get your charting draw tool and connect the V to each other V you see.Connect the / to each other /. Connect the low of the V, the highs of the /. Again, this is a key to learn how to trade.
Lines that slope from the lower left up to the right means the stock is 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 line between the two. If the line is sloping up - its an uptrend. If the line is sloping down, its a downtrend. The other key thing to look at is the oscillations around this trendline. Does it go +/- 2pts, +/- 1pt, +/- .50 etc - on average, not exact.This gives you a decent sense of the trend strength. The lower the oscillation, the stronger the trend. The theory here is the buyers (in an uptrend) or the sellers (in a downtrend) are so strong that it hardly budges against the buying or selling.
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.Additionally, you really need to know the trend direction and strength on the next higher timeframe than you are trading on.One example would be on a 5 minute chart the stock is in an uptrend, while on a longer view (15,30 min) its actually in a downtrend.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 the way it works is if on a 1 min chart, you also want to look at a 3 minute chart - if you are using a 5 minute chart, you want to look at a 15 min chart also. Once you can easily tell the trend of any chart, other aspects of learning to trade become much easier.
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment