Trend Identification is the reason for the most popular quote for anyone applying Technical Analysis:

“The TREND is your FRIEND”

So why is this quote so sacred to Technical Analysts?

You’ve already learned that technical analysis is based on price movement and not pouring over financial statements in an attempt to assign some future price to a stock based on fundamental analysis.

So why do you want to make the trend your friend?

We all know that stocks (or any other equity) prices are constantly moving.  Up, down, down, up, up and on and on for days, weeks, years, decades, and eras.  The key concept to making money with trend trading in the market is to buy something low and sell it higher or sell something high and buy it lower right?

Now, what if I you noticed that XYZ stock over the last year had traded down to $30 and up to $34 twice.  This would be defined in Technical Analysis terms as a “sideways trend.”  You decided you wanted to invest in the stock next time it reached $30 dollars with the intention that it would go to $34.  That would be a great trade right!

Compare the example above with ABC stock that started the last year at $30.  The stock would go up to $34 then down to $32 then up to $36 then down to $34.  What is the difference between this example and the one above?

In the first example, XYZ is trading down in price the same amount as it is trading up.  In the second example, ABC stock is trading up $4, down $2, up $4, and so on.  The overall trend of ABC stock is up.  Trending stocks provide the trader or investor with more potential for profit and less risk to the downside.  Now, there is always the chance that when you decide to buy that the trend will end (and trends eventually always end).  However, this should illustrate the point that trending stocks provide more profit potential and less risk hypothetically than non trending stocks.

So now you may be asking, okay how do I become an expert at Trend Identification?

The first thing you have to do when identifying a trend is to ask yourself, “What is my investing/trading time frame?”

Are you a short term, intermediate, or long term trader?  This is a question you have to answer definitively BEFORE getting into a trade and once you make this decision it doesn’t change.

Let’s define the time frame for these types of traders:

Short Term
Trade lasts days to weeks

Intermediate Term
Trade lasts weeks to months

Long Term
Trade lasts months to years

Now that you know what timeframe you are trading let’s define what exactly is an uptrend and what exactly is a downtrend (shockingly simple)?

Uptrend
An uptrend is defined as establishing higher highs and higher lows

Downtrend
A downtrend is defined as establishing lower lows and lower highs

Take a look at an example of both an uptrend and a downtrend that fits these definitions.

Price in an Uptrend

Price in a Downtrend