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Trend Trading Set-Ups: Entering and Exiting Trends for Maximum Profit by Alan Farley, L.A. Little

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CHAPTER 1

Identifying and Qualifying Trend Probabilities

Historically, trend was generally defined as a series of higher highs and higher lows (bullish trend) or a series of lower highs and lower lows (bearish trend). This general definition took hold at the turn of the twentieth century and, for the most part, has held sway ever since.

In Trend Qualification and Trading,1 a more precise and valuable definition of trend was proposed. It suggested the idea that significant price points could be systematically determined on a chart and that these price points would typically end up being at price extremes. These price extremes would have significance because any subsequent test of the price point would provide a comparison. Essentially, the volume on the prior price extreme could be compared to volume on the current price test. This comparison yields insight into the enthusiasm and conviction of the buyers and sellers. If market participants are willing to buy an increasing number of shares at new price extremes, then, for whatever reason, the buyers are expressing their belief that prices will go even higher. The same is true of sellers selling an increasing number of shares at lower and lower price extremes. By measuring this outward expression of conviction, the true equation of the supply and demand of the stock can be made and it is made at the price point where it matters, which typically is at price extremes.

This fundamental approach to a stock's supply and demand characteristics ...

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