To Learn To Trade, You Must Know The Trend
An odd thing happens if you put up a stock price chart and ask a bunch of people 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 stems from many people not knowing the proper method to actually find the trend on a chart. 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 point of putting up 5 years of data if you are looking for a daytrade to hold for 5 minutes – that is completely pointless. 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.
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 is easier to see the trend.Start by looking for every 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 way: Find the first bar on the chart to the left and the last price on the right. 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 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 gives you a general sense of the strength of the trend. 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. 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 paid attention to, because the longer term trend can push the shorter term trend back into a downtrend. In general, you want a higher term chart to be a multiple of 3 vs the chart you are trading.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.
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