Buying a stock at the perfect time is the holy grail of trading. Traders will spend ungodly amounts of money on tools, newsletters, and gurus just to be in the right stock at the right time.
At the end of the day it boils down to trends and there are three types of them:
Sideways Trend (Neutral)
The advantage of finding the trend of a stock is that you can “sort of” see the future and capitalize on the future move of the stock. I say “sort of” because, truth be told—NO ONE CAN SEE THE FUTURE.
At the end of the day, we are all trying our best to guesstimate where we think the market is most likely heading. In an effort to make it easier for you, we have come up with five ways to spot a trend.
Remove the Clutter
One of the quickest and oftentimes overlooked way to spot a trend is by using a line chart. Yes… a line chart. It removes all the highs and lows and just shows you the closing price of the stock for the time period. The advantage is that you get to look at the price of the stock for what it is without getting distracted or misguided by the noise of a candlestick bar.
Once you have your line chart of the stock that you are looking for, simply take a minute and try to spot the overall trend of the stock. Is it going up, down, or sideways. If it’s not immediately clear, then skip that stock and move on to the next one until you find a chart that makes sense to you.
Find Tops and Bottoms
Another way to spot a trend is first by spotting the top and bottoms of a chart. Every stock has its good days and bad. A chart can quickly show you when the stock performed the best and the worst during a period of time. These tops and bottoms are also know as support and resistance areas. Using these can help you spot if a trend is about to start or finish. If a stock is at a resistance level and breaks through, this could be the start of a new trend. If it doesn’t it may mean the current trend will continue.
Most Popular – Moving Averages
By far the most popular way to find trends is by looking at an indicator known as moving averages. Moving averages take a set period of time (50 days) and averages out the price and plots a line. If this line is going up then the stock is bullish… vice versa if the line is going down.
One simple moving average is nice to look at, but doesn’t always give you the best picture of what’s going to happen next. Do take it up a notch try combining moving averages together.
For example, take a 50-day and 200-day and put them on the same daily or weekly chart. Where the two lines converge is where the magic happens. If the 50-day moving average is above the 200 then it’s a bullish trend. If the 200-day is above the 50-day then it usually means the stock is in a bearish trend. This simple yet effective use of moving averages has helped me make some of the best trades in my life.
Trendlines and Channels
The tighter a stock trades in a range on a trendline the stronger the trend. The more volatile and bigger price movements indicates that the trend is weakening as a correction is coming.
How do you set them up?
You take a stock and you draw a line on the top end of the trend and another one at the bottom end creating a channel. If the stock starts to move outside the channel then you know that the trend is weakening.
This, along with other methods I have covered in the past, are helpful ways to spot trends in almost any stock or commodity. They may seem simple, but I believe the most scalable and profitable things in life are simple. Don’t overcomplicate your trading and don’t make the mistake of thinking you are too smart for simple indicators. No one knows what’s going to happen tomorrow. We only get clues, and therefore prudence, patience, and risk management need to also be in play to make your portfolio grow significantly over time.