How to Understand Stock Market Trends

If you are trading the markets, as opposed to doing long-term investing, then you will need to find a way to determine the general overall trend that the market is in. While there is no magical formula for always knowing the trend of the market (after all, the market must change direction at some point and it is not always clear when the change takes place) there are, nevertheless, a couple of ways for you to judge the trend of the market well enough to put you ahead of the pack when it comes to trading the markets.

Print the largest version you can of a 1-year daily chart of the stock you are interested in.

Decide simply by looking at the chart whether the stock has generally gone up or down over the past year. If the stock has generally gone down in price over the year, then find a high point on the chart and draw a line connecting this high point with the highest point on the downward slope of daily trading ranges. If the market has generally gone up over the past year, then draw a line from the lowest point on the chart through the lowest point on the upward slope of daily trading ranges. This downward or upward line you have drawn is known as a trend line.

Read Also: Advantages of Buying a Corporate Bond

Allow the trend line to extend all the way to the current day's trading. If the current day's trading is below a downward trending trend line then the market is still moving down. However, if the current day's trade has broken through the downward trend line and is now above the line then the market may be changing direction and beginning an upturn. Similarly, if the current day's trading is above an up-trending trend line then the trend is probably still continuing up. However, if today's trading has broken below the up-trending trend line, that could indicate a change in trend.

Print a 3-month daily chart (the largest size you can print). Draw the same type of trend lines on the 3-month chart that you drew on the 1-year chart. That is, if the overall trend appears to be down, then draw a line from the highest point on the chart through the highest point on the down-trending daily trading ranges and allow the line to continue to today's trading. If today's trading remains below the downward trend line then the stocks trend remains down. If the overall trend appears up, then draw a line from the lowest point on the chart through the lowest point on the up-trending daily trading ranges and then continue the line to day's trading. If today's trading is above your up-trending line, then the market remains in an up-trend. However, if today's trading is below the up-trending trend line, then the market may be signaling a down-trend.

Compare the results you found on the 1-year daily chart with the results you found on the 3-month daily chart. If both charts (and their trend lines) are in agreement that the market remains in either an up-trend or a down-trend, then that is one of the best indications you can get.

Related Post: Examples of Low Risk Investments