What Is A Trend ?

What exactly is this trend that the investor wants to ride to make money? A rising trend, or uptrend, occurs when prices reach higher peaks and higher troughs. An uptrend looks something like Chart A. A declining trend, or downtrend, is the opposite—when prices reach lower troughs and lower peaks. Chart B shows this downward trend in price. A sideways or flat trend occurs when prices trade in a range without significant underlying upward or downward movement. Chart C is an example of a sideways trend; prices move up and down but on average remain at the same level.

       Charts shows a theoretical example of an uptrend, downtrend, and sideways trend. But, defining a trend in the price of real-world securities is not quite that simple. Price movement does not follow a continuous, uninterrupted line. Small counter-trend movements within a trend can make the true trend difficult to identify at times. Also, remember that there are trends of differing lengths. Shorter-term trends are parts of longer-term trends.

       From a technical analyst’s perspective, a trend is a directional movement of prices that remains in effect long enough to be identified and still be playable. Anything less makes technical analysis useless. If a trend is not identified until it is over, we cannot make money from it. If it is unrecognizable until too late, we cannot make money from it. In retrospect, looking at a graph of prices, for example, many trends can be identified of varying length and magnitude, but such observations are observations of history only. A trend must be recognized early and be long enough for the technician to profit.