Trend Determination – contd…
by Sumit Gupta on June 2, 2010

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Trend determination is a very important topic in stock trading. As discussed earlier, one should always trade with the trend and hence, one needs to know what is the trend.

The trend may be UP, DOWN or UNCERTAIN. If trend is UP, we BUY (go LONG) to make profit. If trend is DOWN, we sell first (go SHORT) and then buy later to make profit. If trend is UNCERTAIN, we do nothing. We wait for a change in trend and once trend change confirms, we get in market again.

I would re-iterate at this time once again (and I will keep repeating again and again in our journey together), that our first objective in the market is to survive and then make money. By this I mean, protect our capital by taking limited risk and make money when the opportunity arrives.

Let me compare it with batting in crickt test match. You are on crease and the fielding side is bowling well. You defend on good balls (to save your wicket) and when a loose ball comes, you go for the big hit. Same in the stock market. Uncertain trend is one where the pitch in not condusive to batting but favors bowlers. In UP and DOWN trend, you need to play the right shot in the right direction

Obviously, how you trade will depend on your risk apetite as well as whether you are in for a Test match, one day or 20:20. I am in for a never ending series of TEST MATCHES. 20:20 is good for entertainment, but then entertainment doesn’t make money for every one!!!

I intend to get into charts now for next couple of posts so that we get ourselves familiar with trend determination. We will also discuss Strong and Weak trends and how to measure the strength (or weakness) of the trend.

Let’s look at some charts. This is Real Stufff ……..

ICICI Bank Daily Swing Chart



In the chart above, please see the LOWs and HIGH marked by circles. The trend is clearly DOWN. Not a good time to Buy. Is it good time to hold or sell out? I have an answer but …..

Let’s look at ICICI Bank weekly swing chart now :-

ICICI BANK WEEKLY SWING CHART



Weekly trend is also down. When both Daily and Weekly charts show a DOWN trend, stay away from buying. Whether you sell or hold, that would depend on Resistance and Support levels which we will study together at a later time.

INFOSYS DAILY SWING CHART



Please see the direction of the arrows . TREND is UP. Now look at the Weekly SWING chart for Infosys below:

INFOSYS WEEKLY SWING CHART



Trend is UNCERTAIN. However, from my analysis, it may be a good time to Buy for targets 2786 or 2842, once it trades above 2652 on Thursday, 3rd June 2010. STOP LOSS – 2617.

RELIANCE DAILY SWING CHART



This is a little interesting. The trend is UNCERTAIN but as of NOW. The previous TOP is at 1048.95. SO, the moment Reliance trades at 1049 on Thursday (or without making a LOW day), Trend will turn UP. Look at Weekly chart:

RELIANCE WEEKLY SWING CHART



UNCERTAIN trend, just as Daily chart. Interestingly, the Weekly trend will turn UP once Reliance crosses 1093.50

I guess, it’s enough practice for one day. Revise and absorb the learning contained herein.