Before diving into understanding the basics of identifying the trend of a stock, you must read the previous blog about ‘Understanding Demand and Supply in Stocks’.
What is a Trend?
Google defines a trend as ‘a general direction in which something is developing or changing’. Yes, that’s right and everything in this world follows a trend. For example, the sales of masks since the pandemic has been in an uptrend. The sales of electronic gadgets has seen a massive uptrend since the 20th century- and so on.
The same is applicable to anything that is associated with a price. The price tends to trend either upwards or downwards. Sometimes, the price does not go anywhere and can keep moving within a range – this is not a trend, but rather a sideways price movement.
In stocks markets, we want to buy a stock that is in an uptrend to make money. If we buy a stock that is in a downtrend, then we will end up losing money.
Why do Trends form?
Trends form because there is a change in the perception of buyers and sellers who are buying or selling something. For example, let’s take the price of onions. Just before the monsoon season starts, there is a change in perception that the the supply of onions will start reducing because either onions will get rotten due to the rains or farmers will stop growing onions fearing crop damage. This change in perception will ensure sellers stock up on onions and increase the price knowing that there will be decreased supply in the market, resulting in continued increase in prices until the perception changes again. Such change in perceptions can cause rapid increase/decrease in price of anything that is traded in the world- and all these changes can be observed in a price chart.
How to identify a Trend?
If you just open any price chart and zoom out to the Monthly Timeframe, you will be able to spot the trend in price easily. (Refer to this blogpost, if you would like to know how to switch to the Monthly timeframe in a price chart).
Below is the price chart of Asian paints and it is very obvious it has been in a long-term uptrend since 2000.
But, there is a certain price behaviour that defines whether the stock in an uptrend or downtrend.
In the below chart, I have taken the example of Reliance to define an uptrend. The chart explains the price behaviour required to identify an uptrend. It also highlights the price ranges to look out for along with the reversal points.
In short, an Uptrend is said to be forming when the low points from where price is reversing upwards, keep moving higher and the high points from where the price is reversing downwards also keep moving higher. In technical analysis terms, this is called a ‘Higher High (HH) – Higher Low (HL)’ formation which indicates an Uptrend.
In the below chart, I have taken the example of Suzlon to define a downtrend.
In short, a Downtrend is said to be forming when the low points from where price is reversing upwards, keep moving lower and the high points from where the price is reversing downwards also keep moving lower. In technical analysis terms, this is called a ‘Lower High (LH) – Lower Low (LL)’ formation which indicates a Downtrend.
I hope you find this detailed explanation useful. You can now go and take a look at your stock portfolio and try to identify which of your stocks are currently in an uptrend or downtrend.
If you have any questions, feel free to post them in the comments section.
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