Is the stock market trending up, down, or not trending at all?
Trends matter in real life. Remember the iPhone craze in Singapore? People were willing to pay a substantial premium to buy the latest iPhone model during the 1st few weeks of its launch. This trend and craze went on for a couple of years before dying. Similarly, price trends in stocks matter. If you are bullish, you’d buy stocks. To make money, the price of your stock must go up in price. Price needs to trend higher for you to make more.
Conversely, if you are bearish, you’d short-sell. To make money, the price of your stock must drop in price. Prices needs to be in a downtrend for you to make more.
With that understanding, here are 3 simply hacks to help you identify if the price of a stock is trending up, down, or going sideways in less than 5 seconds.
#1 Line Chart
Starting out, I looked at line charts. This is because it’s easy to look and decide if the stock is in an uptrend, downtrend, or trendless.
As a trader, I’d be looking at the performance of the stock’s price in the past few months to a year. If you’re intending to invest for the long term, its advisable you look at the performance of the stock’s price in the past 5 to 10 years. A trader and investor may come to a different conclusion given the span of price data he or she will be looking at.
Let’s use Jacobs Engineering (J) as an example. As a trader this is what you’ll see in Oct 2021. In this chart, you can easily tell that the price of J is ranging $128 and $138. There’s no trend. As an investor this is what you’ll see in Oct 2021. J is in a mighty uptrend! It is clear that the price of J is increasing over time.
Yes, the line chart isn’t going to be very useful as your progress in your journey in the stock market. This is because candlestick charts provide a lot more details which will be helpful in securing more profits.
#2 Moving Average
Are you using candlestick charts? If so, this method will help you identify if a stock is in an uptrend, downtrend, or sideways. Introducing, the Moving Average indicator! Hang on a minute! Aren’t there a few types of Moving Average indicators? Which type should I use?
PS: The Moving Average indicator is discussed here in Part 1 and Part 2.
I prefer using the Exponential Moving Average (EMA) indicator as it gives the latest price more weightage. Shall we continue to use the chart of J as an example?
If you’re a trader, you’ll want to zoom in to the last few months of price data for J. Here’s what you’ll see with the EMA in purple. Given that you are a trader, you’ll want to find short term opportunities in J. Using an EMA with a shorter period of 20 days will suit you better than a longer period of 50 days.
What do you notice about the EMA? Did you observe that it’s wavy (I mean, the EMA is sloshing around like an object in a pool of moving water)? When you see this, the EMA is telling you that prices are ranging instead of trending up or down.
Let’s see what you’ll see as an investor on the long term chart of J with an EMA of a longer period of 100 days. As a longer term investor, you’ll want to use the longer term EMA to show you a smoother EMA line. In the big picture, the price of J is still in an uptrend as the gradient of its EMA is positive overall.
Is the Moving Average indicator your cup of tea? If it isn’t fret not. There’s another tool you can use to help you identify if a stock is trending.
#3 Value Zone
At 1st glance, you’ll spot a distinct similarity between the Value Zone (VZ) and EMA indicators – their gradient to tell the trend. But that’s where the similarity ends. The chart above shows the short term chart of J and its daily VZ.
Here, the VZ is horizontal, indicating that there’s no good trading opportunity. The chart below shows the long term weekly chart of J and its weekly VZ with multiple investing opportunities. Do you see that there are 2 colors of the VZ – green and red?
Yes, you’ve guessed it right.
When the VZ is green, it indicates that J is ranging or in an uptrend. When the VZ is red, it implies that J is in a downtrend. In addition, the VZ is formulated from careful and thorough research with endless back-tests.
The VZ forms part of a well constructed and easy-to-implement strategy to help traders and investors achieve consistent profits from the stock market. This strategy is called the TPB Swing strategy which has a proven win rate of 71%.
3 Things You Must Remember
#1 Identifying the trend of a stock can be easy by using any of these hacks
#2 There are slight differences to interpreting the trend for a short term trader compared to a long term investor
#3 The TPB Swing strategy has a reliable win rate of 71% to help you make consistent profits
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