The stock trend analysis that you need to do will depend on the type of trading you are doing and the timeframe you are working with.
I’ll now present some stock trend analysis ideas that can be used to create a successful medium-term trading system.
Note: I consider medium-term trading to have a holding period of approximately 3 to 6 months. Keep in mind that medium-term trends can turn into long-term trends if the momentum persists. As long as your stops aren’t hit, you remain in the trade and have the opportunity to lock in higher profits due to the extended run up.
The Medium-Term Trading Idea
My medium-term trading approach aims to capture strong upward moves that last for a number of months. The idea is to get on board trends that have a high probability of continuing and thus enabling you to lock in some decent profits.
What we’re essentially looking for is a strong, consistently rising uptrend that has existed for a few months.
Depending on your trading system you may enter after a breakout above resistance (for breakout traders) or enter on a pullback towards a medium-term moving average with a long-term moving average (and momentum indicators) rising.
That’s the theory.
Let’s look at some details…
Stock Trend Analysis
When it comes to stock trend analysis I’m fussy. I’m only interested in getting on board the best trending stocks in the market.
When looking for trading candidates, I create a list of stocks that have the basic attributes I want to see. Then I whittle down the list until only the very best stocks remain.
I then have a quick look at the fundamentals for each stock candidate, in particular looking at the year-on-year (i.e. past year) earnings growth and Return On Assets ratio. If you’re a purely technical trader then you won’t be checking any fundamental criteria (some traders don’t believe in fundamentals just as some fundamentalists don’t put much faith in technicals – do some back testing using historical data then you be the judge).
Stock Trend Attributes
Stock trends can be assessed according to their:
- overhead resistance
- volatility, and
Let’s look at each attribute in turn . . .
If the trend isn’t of sufficient quality then my stock trend analysis ends there. I need to see a stock rising in a consistent and orderly manner. It doesn’t have to be perfect, just a series of easily defined higher peaks and higher troughs.
I don’t want to see any excessive pullbacks or long downward price spikes penetrating my medium-term moving average.
Quite simply, I want the stock to remain above its medium-term moving average since the uptrend started.
For medium-term stock trend analysis, 50-, or 65-, or 75-day exponential moving averages are all good choices (I’m quite fond of the 65-day moving average).
Note: for the purposes of this test, the trend starts when the first price bar (or candle) moves above your medium-term moving average. That is, the whole of the price bar is above your MA (not touching it).
There are a number of approaches you can take here but I prefer the ADX indicator.
If ADX is greater than 25 with +DI above –DI then you have a strong trend.
ADX above 25 with the stock trending in a consistent fashion above your medium-term moving average can be the starting point in your stock trend analysis.
There is a compromise in trend trading. You can get in early and attempt to capture the entire move, or you can wait until the trend proves itself before entering.
I prefer high probability trading situations. I want the uptrend to exist for a few months before entering.
This refers to situations where the stock price has been higher than the current price in recent years.
Why does overhead resistance matter?
Overhead resistance is a psychological construct.
There are a few reasons why this affects investors.
If an investor buys a stock at $10 and over time the price falls to $5, he/she may get disheartened but hold onto the stock in the hope that it will eventually rise back to $10 in which case they will sell it so they can break-even.
Overhead resistance is often a point where selling occurs causing resistance to the extent that the stock doesn’t easily rise above it.
Some traders look for stocks with no overhead resistance at all (i.e. stocks at all-time highs) and others may just look for stocks at 52 week highs.
The main thing to be considered about overhead resistance is that if it does exist, it’s not too close to the current price.
Volatility is simply how much a stock moves up and down in one period. If you are using a daily stock chart, daily volatility can be measured as the difference between the highest price reached and the lowest price reached for a given day.
High volatility stocks can trigger your stop-loss early kicking you out of a continuing trend. This is not only an annoying situation it can cost you money in the form of extra brokerage costs if you decide to re-enter.
Stocks tend to move from lower volatility at the start of a new trend to a higher volatility at the end of the trend. If a stock is significantly more volatile than usual, the uptrend could be coming to an end.
Give high volatility stocks a miss.
The best trending stocks in the market aren’t any good to you if the stock isn’t traded at sufficient volumes for you to buy when you need to and exit when need to.
Thinly traded stocks are best avoided for most traders (especially beginners).
You need to look at the volume histogram to determine whether the average daily traded volume is high enough for you to enter a position.
Get into the trade after the trend establishes itself. Only trade the stocks that are trending in a strong consistent way without excessive volatility. Stocks that are traded at decent volumes work best.
Remember this trading maxim: “The trend is your friend”