DEFINITION of Uptrend
An uptrend describes the price movement of a financial asset when the overall direction is upward. In an uptrend, each successive peak and trough is higher than the ones found earlier in the trend. In the example below, notice how each successive high and low is located above the previous ones.
For example, the high at point 4 is above the high at point 2 and the low at point 5 is above the low at point 3. The uptrend is broken if the next low on the chart falls below point 5. The opposite of an uptrend in a downtrend.
Example of an Uptrend
BREAKING DOWN Uptrend
An uptrend provides investors with an opportunity to profit from a security until it reverses. Selling a security once it has failed to create a higher peak and trough is one of the most effective ways to avoid large losses that can result from a change in trend. Many technical traders also draw trendlines to identify an uptrend and spot possible trend reversals.
Moving averages are another popular tool used to determine if a security is in an uptrend. Traders look for price to be trading above the moving average and for it to be rising. Measuring the strength of a trend can be achieved by using the average directional index (ADX) indicator. Readings between 25 and 50 indicate a strong uptrend is in place, while readings under 25 tell traders that a security is rangebound. Investors who trade uptrends may be referred to as “trend followers” or “momentum traders.” (For further reading, see: The Four Most Common Indicators in Trend Trading.)
Entering an Uptrend
The best time to enter an uptrend is when price retraces back to a support level. Support can come from a trendline, a moving average or previous price action. For example, a security might retrace back to its 50-day moving average, or a previous swing high.
Traders can also use momentum indicators, such as the relative strength index (RSI) and the stochastic oscillator, to help determine when an issue may be reaching an oversold level. For instance, a trader may buy a stock if its price returns to an uptrend line and the RSI is below 30. Good entry points in an uptrend should have a confluence of support from multiple indicators.
In the example below, the retracement to a key support level proves to be an excellent entry point. Support comes from the long-term trendline, the 50-day moving average and an oversold stochastics reading: