Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis

CHAPTER 2

Trend Direction

The trend indicates the direction the market is moving. There are only two directions in which markets can trend—up or down. There will also be phases where no trend is present and price moves primarily sideways for a period of time. Those trendless periods are often referred to as consolidation, or a trading range.

Personally, I like to stay informed as to the fundamental reasons why the market may be trending or consolidating; and I find that doing so helps to explain certain charting phenomena. However, it is not necessary to know what's driving the market up or down in order to profit from that trend. In his book The Visual Investor (John Wiley & Sons, 1996, p. 5), John Murphy states, “Knowing the reasons behind a stock's movement is interesting, but not critical. If your stock goes up on a given day, they won't take the money away from you if you don't know why it went up. And if you can explain why it went down, they won't give you back your lost money.” He goes on to say, “The trick to visual investing is learning to tell the difference between what is going up and what is going down.” Making that determination is the focus of this chapter.

A stock's price, or a market's value, cannot trend, nor can it move sideways, without the movement being imprinted on its chart. The effective analysis of that movement, and taking prudent action based upon it, can give a trader an edge. This chapter provides instruction on how to quickly and easily determine ...