Wednesday, December 28, 2011

Trendlines

Trendlines form the foundation of technical analysis.

They are constructed by connecting a series of peaks and troughs. While an uptrend is formed by joining successive peaks, a downtrend is formed by joining successive troughs. Trendlines may be horizontal if stock price is trading sideways.

For a beginner, try to use the "drawing tools" from the ChartNexus to practice on the trendlines, get yourself familiar with 'recognizing' the trend first, because later we need to use these lines to draw chart patterns such as triangles and rectangles.

How to tell whether it is a bull trend or a bear trend?

There are 2 ways: (1) Trendlines (2) Moving Averages

(1) Trendlines
  • Bull trend is when you see "higher high" of the peak. That is: you'll see the price forming a higher peak than the previous peak.
  • Bear trend is when you see "lower low" of the trough. That is: you'll see the price moving downwards, forming lower trough than before.

(2) Moving Averarages

Moving Averages is a technical indicator can be found easily in the charting software. The details I'll talk about it when I come to the Technical Indicator section. Here, I'll just talk about the application on trends first.

  • 20 day moving average - this indicates the short term trend (< 4 weeks). That is: when the price is above the 20 day moving average, its consider short term bullish; and when its below, indicates short term bearish.
  • 50 - 100 day moving average - this indicates the medium term trend (1 month - 9 months). When price is above the 50 - 100 day moving average, its consider medium term bullish; and when its below, it indicates medium term bearish.
  • 200 day moving avearge - this indicates the long term trend (>9 months). When price is above the 200 day moving average, its long term bullish; and when its below, its long term bearish.

Homework: Try running the various moving averages on our KLCI and see what's the current trend?


Happy learning,

Pauline Yong

2 comments:

jeefoh said...

short and sweet!
Thanks!

jeefoh said...

i've tried, short term bullish? =D