What Is an 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. The uptrend is therefore composed of higher swing lows and higher swing highs. As long as the price is making these higher swing lows and higher swing highs, the uptrend is considered intact.
Some market participants only choose to trade during uptrends. These "long" trend traders utilize various strategies to take advantage of the tendency for the price to make higher highs and higher lows.
Uptrends may be contrasted with downtrends.
- Uptrends are characterized by higher peaks and troughs over time and imply bullish sentiment among investors.
- A change in trend is fueled by a change in the supply of stocks investors want to buy compared with the supply of available shares in the market.
- Uptrends are often coincidental with positive changes in the factors that surround the security, whether macroeconomic or specifically associated with a company's business model.
Understanding an Uptrend
An upward trend provides investors with an opportunity to profit from rising asset prices. Selling an asset 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. Some technical traders utilize trendlines to identify an uptrend and spot possible trend reversals. The trendline is drawn along the rising swing lows, helping to show where future swing lows may form.
Moving averages are also utilized by some technical traders to analyze uptrends. When the price is above the moving average the trend is considered up. Conversely, when the price drops below the moving average it means the price is now trading below the average price over a given period and may therefore no longer be in an uptrend.
While these tools may be helpful in visually seeing the uptrend, ultimately the price should be making higher swing highs and higher swing lows to confirm that an uptrend is present. When an asset fails to produce higher swing highs and lows, it means that a downtrend could be underway, the asset is ranging, or the price action is choppy and the trend direction is hard to determine. In such cases, uptrend traders may opt to step aside until an uptrend is clearly visible.
Two common price action trading strategies—which can be confirmed or invalidated with additional input from technical tools and indicators—are to buy when the price pulls back during an uptrend, or to buy when the price is attempting to make a new swing high. Even as the price rises, it will oscillate up and down. The moves lower are called pullbacks. If a trader or investor believes the price will continue higher after the pullback, they can buy during the pullback and profit from the ensuing price rise.
Some trend traders view buying during a pullback as too risky or time-consuming since there is uncertainty as to whether the price will rise again, and when. These traders may prefer to wait for the price to be definitively rising again. This means they may end up buying near the prior swing high, or when the asset pushes into new high territory.
Both strategies require specific entry criteria to enter a trade. The trader buying during pullbacks may look to buy only if the price is near anticipated support, such as a rising trendline, moving average, or Fibonacci retracement level. They may also wait for selling on the pullback to slow and for the price to start turning up before buying.
Traders that buy near prior highs, because they want to see that the price is moving higher again, may decide to only enter once the price moves above a short-term resistance level. This could be a consolidation or chart pattern high. Alternatively, they may wait for the price to move to new highs on a big volume jump, or for a technical indicator to flash a buy signal.
Risk is controlled with a stop loss. This is typically placed below a recent swing low since the trader is expecting the price to move higher.
Ways to exit a profitable trade are plentiful. These could include when the price makes a lower swing low, a technical indicator turns bearish, a trendline or moving average is broken, or a trailing stop loss is hit.
Example of Analyzing and Trading an Uptrend
The following Facebook Inc. chart shows numerous examples of potential trades using support or penetration of resistance on increasing volume. A moving average has been added to aid in finding possible support areas.
Several longs have been highlighted with arrows that show a break of resistance on increased volume. The price consolidated while in an overall uptrend and then broke higher. Waiting for the volume increase was important; otherwise, it is possible that trades would have been entered too early, or not at ideal times.
The small green arrows that are not linked to volume increases are a few of the potential trades that occurred during pullbacks or near support. In these cases, trades are marked where the price fell briefly below the moving average, but then started to climb again.
There are many strategies that can be associated with uptrends. These are general entry strategies for demonstration purposes only.
While the price was in a downtrend, trades were avoided.