Uptrend
Uptrend is characterized by a series of higher highs and higher lows. The analyst watches carefully to see if the upward price movement will become a valid uptrend. A line is drawn under the rising bottoms in the fluctuating uptrend. It takes two rising bottoms to define an uptrend line and three confirm it. A line above the rising tops in the uptrend helps the analyst to determine the range of fluctuation within the uptrend. The range, or channel, defined the support (line of lowest lows) and resistance (line of highest highs) for the uptrend. The analyst believes that generally prices will stay within this channel until the uptrend is reserved[1].
We can define an uptrend as[2] :
- price being above a particular moving average, or
- we can add a further requirement that the moving average must also be sloping upwards, or
- we can use two moving averages and define an uptrend as the shorter moving average being above the longer moving average, or
- we can use three moving averages and define an uptrend as the moving averages configured with the shortest above the middle average, and the middle average above the longest average
Trend line rules
The following rules are usually applied to trend lines and channels:
- Declines approaching an uptrend line and rallies approaching a downtrend line are often good opportunities to initiate positions in the direction of the major trend.
- The penetration of an uptrend (particularly on a closing basis) is a sell signal; the penetration of a downtrend line is a buy signal. Normally, a minimum percentage price move or a minimum number of closes beyond the trend line is required to confirm a penetration.
- The lower end of a downtrend channel and the upper end of an uptrend channel represent potential profit-taking zones for short-term traders.
Trend lines and channels are useful, but their importance is often overstated. It is easy to overestimate the reliability of trend lines when they are drawn with the benefit of hindsight. A consideration that is frequently overlooked is that trend lines often need to be redrawn as a bull or bear market is extended[3].
Criteria for an Uptrend
An uptrend can be identified by the technical events listed in Table:
| Peaks and Bottoms | An uptrend is formed from primarily rising peaks and rising bottoms. |
| Moving Averages | The 20-period moving average will be rising, and price will remain above it, much of the time during the uptrend. If using two short-term moving average, the faster one (e.g., 10-period) will remain above the slower one (e.g., 20-period) throughout much of the uptrend. |
| Support Trendline | An upward sloping trendline can often be drawn below and connecting the prominent rising bottoms. |
During an uptrend, the upward price swings typically consist of primarily bullish candles. The magnitude of those upswings is usually greater than that of dips that follow; otherwise the uptrend could not continue. If price pulls back deeply enough, price may temporarily decline below the rising 20-period SMS. Price will move back above it when the uptrend resumes. In some cases, a pullback will be deep enough for the moving average to turn down temporarily; it will turn back up as price resumes the uptrend[4].
Examples of Uptrend
- Stock Market: A stock market uptrend occurs when the prices of stocks increase steadily over a period of time. This typically happens when investors become bullish on the stock market and start to invest more money. For instance, the Dow Jones Industrial Average has experienced an uptrend since the beginning of 2019, with the index reaching an all-time high of 29,398 points in February 2020.
- Commodities: An uptrend in commodities is when the prices of commodities increase steadily over a period of time. This is usually caused by a rise in demand for the commodity, which puts upward pressure on the prices. For example, the price of gold has experienced an uptrend since the beginning of 2020, as investors have sought out a safe-haven asset in times of economic volatility.
- Currency Exchange Rates: An uptrend in currency exchange rates is when one currency is increasing in value relative to another currency. This is usually caused by a variety of factors, such as a country’s economic performance or geopolitical tensions. For instance, the US dollar has been in an uptrend against the Euro since the start of 2021, as the US economy has shown signs of strength.
Advantages of Uptrend
- Uptrends are a positive sign for investors, as they indicate that the stock or other asset is increasing in value. Uptrends can be used to identify the right time to purchase or sell a stock or other asset, as the investor can predict when the price will be at its highest. Uptrends also help investors identify the momentum of a stock or other asset, which can help with making educated decisions. Uptrends also provide a visual representation of an asset’s price performance over time, which can help investors make decisions when analyzing a stock or asset. Additionally, an uptrend can indicate that the market is in an overall bullish sentiment, which can provide confidence for investors.
Limitations of Uptrend
- Uptrend analysis is not always an accurate way to predict future market behavior. It assumes that prices will continue to increase, but there is no guarantee that they will. Uptrend analysis also assumes that the current trend will remain in place, but it is possible for the trend to reverse quickly. Finally, uptrend analysis does not account for external factors such as news or economic changes, which can drastically affect the direction of prices.
- Trend Analysis: This approach involves looking at the overall trend of the stock or index and determining whether it is on an upward or downward trajectory. This can be done by looking at the price of the stock or index over a certain period of time.
- Support and Resistance Levels: This approach involves looking for levels of support and resistance in the stock or index. Support levels are price levels that the stock or index has difficulty falling below. On the other hand, resistance levels are price levels that the stock or index has difficulty rising above.
- Momentum: This approach involves looking at the short-term momentum of the stock or index. Momentum is the rate of change of the stock or index's price over a certain period of time.
- Volume: This approach involves looking at the trading volume of the stock or index. If the volume is increasing, then it is a sign that the stock or index is gaining more interest from investors.
- Moving Averages: This approach involves looking at the stock or index's moving averages. Moving averages are lines plotted on the chart that show the average price of the stock or index over a certain time period.
In summary, the different approaches related to Uptrend are Trend Analysis, Support and Resistance Levels, Momentum, Volume and Moving Averages. Each approach can be used to identify an uptrend in the stock or index and determine whether it is likely to continue.
Footnotes
| Uptrend — recommended articles |
| Bull flag — Bullish divergence — Symmetrical triangle — Long-legged doji — Dragonfly Doji — Bear flag — Bearish divergence — Chande Momentum Oscillator — Three white soldiers |
References
- Logan T., (2014), Profiting from Market Trends, John Wiley & Sons, New York.
- Nijs L., (2014), The Handbook of Global Agricultural Markets, Springer, London.
- Pryor M., (2011), The Financial Spread Betting Handbook, Harriman House Limited, Hampshire.
- Schwager J.D., (2001), Getting Started in Technical Analysis, John Wiley & Sons, Toronto.
Author: Marlena Dopnik
