The basic definition of an uptrend for a stock is when each successive peak and trough is higher than the ones found earlier in the trend. This is commonly referred to as higher highs and higher lows. While there are many indicators that can help gauge the strength or direction of a trend, they are all derivatives of price. Often, traders get lost in a sea of conflicting analysis techniques and end up over thinking a trade when the simplest methods will often suffice. By paying attention to price action and noting in what direction the highs and lows are headed, traders can easily increase their odds for a successful outcome and not get caught trying to impose their will on a stock.
As silly as it sounds, one of the simplest ways to assess a trend in a particular stock is to note in what direction the bars are headed in the chart you are looking at. Stocks in an uptrend should start at the lower left of the chart and end at the upper right. It sounds fairly easy, but how often do we find ourselves trading something that doesn't fit this most simple of patterns because we are getting some combination of divergences or extreme levels in an indicator? While there are some techniques for taking advantage of countertrend moves, in general a trader should be trading in the same direction as the underlying trend.
Priceline.com (Nasdaq:PCLN) is a nice example of a stock that has been steadily moving from the lower left edge of the chart to the upper right. The trend is at a perfect slope, but is not at an unsustainable parabolic price spike. Also notice how the 50-day moving average is steadily rising, and how PCLN has been finding support on pullbacks to the average. PCLN is trading near 52-week highs and continues to look healthy.
Baidu.com (Nasdaq:BIDU) is another stock that has been steadily moving higher from the lower left to the upper right of the chart. It also has found support on the last few pullbacks to the 50-day moving average and is trading near 52-week highs. Often when a stock trades higher in this fashion, it moves from one consolidation zone to the next. This ends up resembling steps, and an easy way to trade them is to continue holding as long as the steps are moving higher. BIDU is currently in the middle of a step and is worth watching for a move that would break above the current base.
Ctrip.com International (Nasdaq:CTRP) is a good example of a stock moving higher in steps. The general movement is up from the lower left to the upper right, and while there are some volatile moves, the general pattern is also a move from one base to the next. The 50-day moving average is also trending steadily higher, and CTRP looks like it is currently bouncing after the most recent test of the average.
Marvell Technology Group Nasdaq:MRVL) is another stock that finds itself stair-stepping higher. Once again the chart starts at the lower left and moves toward the upper right. MRVL has also held above the 50-day moving average and found support on each pullback to the average.
Traders often devise complicated systems to outsmart the system and generate perfect trading signals. While there is nothing wrong with experimenting and trying new systems, the most basic assessment traders should be making is to determine whether a stock is in an uptrend or a downtrend. This simple method is unbiased and very simple to use. While I can't say you shouldn't be buying something moving from the upper left to lower right, you should have a better reason than "it's a bargain this cheap" for doing so. Following the trend will keep you out of harm's way more often than not. Do you have a simple method for determining a stock's trend? Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.