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What constitutes an uptrend

July 31st, 2019 by dimpledbrain

Stock price does not move in a straight line. It moves in waves.

Conceptually as follows:

  1. If stock price moves like the grey line, there isn’t much we can deduce from.
  2. However in reality, price moves in waves like the following. Even in an uptrend, the stock will move up say 10 points, to reverse back 3 points before going back up 7 points etc
  3. For an uptrend to hold, the upmove will be longer than the downmove. (refer to the black line below)
  4. And vice versa for a downtrend.

The principles that we can deduce from:

  1. Buy in an uptrend
  2. Think in waves
  3. It is easier to spot a top than a bottom. (the reason is rather psychological and obvious- people tend to sell faster/ motivated to sell rather than to buy).
  4. On average, there will be more sellers than buyers. (the motivation to sell, i.e. the need to use money is always stronger, all things constant)

This is a line chart of a real stock. Can you eyeball how many waves (up and down) are there?

My answer as above. As you can see, the yellow lines (uplines) are consistently longer than the downlines (highlighted in blue)

So the stock is moving upwards. So at any point of the blue line, it represents a buying opportunity

Simple isnt it

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