If you closely monitor the stock charts, you will find that stock prices move in one of three directions: up, down, and sideways. No other movements are possible.
In an uptrend, the stock moves higher and higher.
In other words, an uptrend occurs when the stock price is making a series of higher highs and higher lows, which you can see on a chart.
To remain in an uptrend, the stock’s price must keep making higher highs and higher lows. As long as the stock price is making higher highs and higher lows, the uptrend is considered intact.
Instead of higher highs and higher lows, few technical analysts prefer to say, higher peaks and troughs. Both are the same. A peak refers to the highest point and a trough is the lower point.
In other words, if each successive peak and trough is higher than the ones found earlier in the trend, then the market is considered to be in an uptrend.
How to trade an uptrend market
Stock moves according to supply, demand and the mindsets of the market players involved.
If most of the buyers believe that the stock’s value will increase over a period of time and pay a higher price as the sellers elevate the price, the stock moves up. When more buyers start bidding for higher prices, more volume with higher prices comes into the market, resulting in the market to move up.
In an uptrend, buyers or bulls are quicker to buy in on dips.
For bulls most profits are made when the market is in uptrend.
In an uptrend, traders trade continuation chart patterns until they get a confirmation of reversal. We have 3 classic continuation chart patterns which traders love to trade. They are Flag, Pennant and Wedges.
When the stock or security fails to make a higher high and higher lows and breaks the trend line, it’s considered as a trend reversal. Traders wait for confirmation before jumping into a trade.
As a drawing toll, traders use trend lines to identify an uptrend and possible trend reversal.
While declining, if price retracement, or pullback, is not lower than the previous low in the trend, then the stock or market is considered to be in an uptrend.
If the low has been broken decisively, then it’s considered as the uptrend is over.
To confirm the uptrend, traders look for a break in previous highs.
After an uptrend, prices may move sideways for a period of time before going down or up. Few traders call this time period as rolling over.
Stocks break out of bases and into uptrends for several reasons. Here are few most important reasons;
- Institutional buyers suddenly show interest;
- Related industry or sector gains favour;
- Stocks comes out with positive news and good earnings.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
