Trending stocks are “powerful” as they have a lot of momentum. When stocks are trending, it is very difficult to stop them because they have a lot of momentum moving forward.
Trending stocks can be thought of as a giant wave in the ocean. If you are swimming and trying to reach a destination, you want the wave to be on your side and push you from behind and propel you forward. You don’t want to be swimming against the waves. You want to use the waves to your advantage.
There are 2 kinds of trend in the market, uptrends and downtrends.
When a stock is on an uptrend, it has a tendency to keep climbing up higher and higher.
To identify if a stock is on an uptrend, look for the presence of Higher Highs (HH) and Higher Lows (HL).
A Higher High occurs when the most recent high formed, is higher compared to its previous high.
A Higher Low occurs when the most recent low formed, is higher compared to its previous low.
A stock is on an uptrend when it has a series of HH and HL.
The downtrend is just the opposite of an uptrend. During a downtrend, the stock has a tendency to keep going lower and lower.
To identify if a stock is on a downtrend, look for the presence of Lower Highs (LH) and Lower Lows (LL).
A Lower High occurs when the most recent high formed, is lower compared to its previous high.
A Lower Low occurs when the most recent low formed, is lower compared to its previous low.
A stock is on a downtrend when it has a series of LH and LL.
To Identify Trending Stocks
To identify trending stocks in 5 seconds, look at the charts. If you see a series of higher highs and higher lows, the stock is on an uptrend. If you see a series of lower highs and lower lows, the stock is on a downtrend.
Uptrends occur because market participants are bullish about the stock. This can be seen when successive Higher Highs and Higher Lows are formed.
Downtrends occur because market participants are bearish about the stock. This can be seen when successive Lower Highs and Lower Lows are formed.
It is important to know how to identify trends so you know how to use the trend to your advantage. You also want to quickly tell when a particular stock is no longer trending so you can exit the stock quickly.
Learning to identify trending stocks is a simple but vital part of technical analysis and investing in stocks.
Looking for more?
If you found this article useful, please don’t hesitate to share it. I also have a few videos explaining more in-depth on what trends are and how to identify trending stocks. If you are interested, you can view them here on YouTube.
My Udemy course Technical Analysis Fundamentals: Reading Stock Charts covers how to invest in stocks through Technical Analysis. If you are looking to learn about the basics of technical analysis, how to identify trending stocks and invest in stocks. This is a course that you must take!