Technical Analysis : Trend Following for Investment as well as Trading
Technical Analysis :
Trend Following : What is that ?
There are forces of nature which function with their own characteristics. Eg. Gravity. It is an invisible force which ensures that everything stays down on earth. Anything thrown up in the air simply falls down due to gravitational force. Similarly in investing and trading price trend is an important force. Surprisingly price trend is the cause as well as the effect impacting prices.
Movement becomes effortless or with least resistance when one goes in the direction and in sync with various forces at play. Stock prices move in trends. Trends can be majorly of 2 types : Uptrend and Downtrend. Sometimes when market is not trending it can be said to be flat.
It makes sense to follow something that works. That is why Trend Following !
HH=Higher High LH=Lower High
HL=Higher Low LL=Lower Low
Technical Analysis :
Technical analysis assumes that all information studied by fundamental analysis is already reflected in the PRICE of given stock. It is a method employed to evaluate stocks by analyzing statistical trends gathered from trading activity, such as price and volume.
- In technical analysis historical data of stock is used to understand pattern of price movement and to evaluate stocks strength or weakness on the basis of the same.
- Technical Analysis has 3 major assumptions :
- Price moves in Trend
- Patterns tend to repeat
- Everything is factored in the PRICE
- Technical analysis is of great assistance for timing the entry and exit in investment or trading decisions.
Trend Following : What is that ?
There are forces of nature which function with their own characteristics. Eg. Gravity. It is an invisible force which ensures that everything stays down on earth. Anything thrown up in the air simply falls down due to gravitational force. Similarly in investing and trading price trend is an important force. Surprisingly price trend is the cause as well as the effect impacting prices.
Movement becomes effortless or with least resistance when one goes in the direction and in sync with various forces at play. Stock prices move in trends. Trends can be majorly of 2 types : Uptrend and Downtrend. Sometimes when market is not trending it can be said to be flat.
It makes sense to follow something that works. That is why Trend Following !
HL=Higher Low LL=Lower Low
Trends can form on all time-frames namely Hourly , Daily , Weekly, Monthly. From an investor perspective it is important to analyse and study trends on higher time-frames like weekly and monthly charts. From a traders perspective as the horizon is smaller it will make sense to study hourly or daily time-frame charts. Price trends on higher time-frames have more impact on the stock prices in the long-run.
Uptrend :
In uptrend stock price tends to make a series of Higher High(HH) and Higher Lows(HL).
All the Lows are higher than the previous Lows indicating that there is constant demand at declines which eventually leads to higher prices in future.
As the natural momentum is upward the stock price which is in uptrend moves effortlessly on the higher side. Investors must invest only in those companies which are in uptrend on higher time-frames of weekly and monthly charts.
Downtrend :
In downtrend stock price tends to make a series of Lower High(LH) and Lower Lows(LL).
All the Highs are lower than the previous Highs indicating that there is constant supply at upsurge which eventually leads to lower prices in future.
As the natural momentum is downward the stock price which is in downtrend moves effortlessly on the lower side.Investors must always avoid investing in those companies which are in downtrend on higher time-frames of weekly and monthly charts.
Trend is your friend until it bends !
Charts for stocks are available free for study on -> (Trading View)
