Uptrend

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Uptrend
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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:

  1. 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.
  2. 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.
  3. 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:

Criteria for an Uptrend
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].

Footnotes

  1. L. Nijs 2014, p.357
  2. M. Pryor 2011, p.134
  3. J.D. Schwager 2001, p.34-35
  4. T. Logan 2014, p.126

References

Author: Marlena Dopnik