Master Trader Trend Analysis
How You Can determine if it’s an Uptrend or Downtrend Every Time
Most investors and active traders focus on stocks, ETFs, and futures trends that are rising or about to rise. Since over the very long-term, prices do rise, that is understandable.
However, money can be made when prices fall and are in a downtrend. And since the broader markets are in a mini bear market at this time, being able to define a clear downtrend is a timely subject.
In addition, it is being able to define when the trend changes from up to sideways and from sideways to down can save you from holding onto a stock that has reversed direction.
An objective black-and-white analysis method will stop you from being confused about trends.
Let’s start with something you probably already know but may not have a clear method of defining.
An uptrend is defined as higher highs and higher lows, and a downtrend is defined as lower highs and lower lows.
Defining Trend Swing Points or Pivots
I’m sure you can see on the above chart where prices were trending up, started to trend down, back up again, and then back down.
Without a clear method of defining the turning points and trend changes, it will lead to confusion subjective analysis that will likely result in losses and missed opportunities.
We will not use trendlines based on connecting turning points on the chart that you may define as a turn and someone else may not. That leads to subjective analysis and uncertainty.
We will define the beginnings of a low turn as a bar with three higher lows adjacent to a single bar.
We will define the beginnings of a high turn as a bar with three lower highs adjacent to a single bar.
We will refer to these beginnings of a turn as a Pivot. There will be Pivot Highs and Lows.
Defining an Uptrend and a Downtrend
Now that we’ve defined what a Pivot is, we can look at a chart objectively and systematically to define an uptrend or a downtrend.
A series of higher Pivot highs and higher Pivot Lows is an uptrend, and it will stay in an uptrend until that definition is no longer met.
A series of lower Pivot highs and lower Pivot Lows is a downtrend, and it will stay in a downtrend until that definition is no longer met.
Defining When the Trend Has Changed
In the above chart, each Pivot high has been marked with a red dot, and Pivot low has been marked with a green dot.
In an uptrend, the Pivot low before a higher high will be our reference point of Major Support. We’ll call it Major Support because if it is violated, the trend is no longer up.
In other words, every time prices make a higher high within that uptrend, the prior low will be our reference point of Major Support, and if violated, the trend is now defined as sideways.
If you visually follow what has been explained, you will see that a trend can be violated and resumed at times. This can happen in any market or stock.
Don’t be confused by this because markets themselves become confused and erratic at times. Our job is to follow what is, and we have an objective method.
At Master trader, we don’t offer or subscribe to a perfect method. There isn’t one, but we have a clearly defined method based on price action. Not indicators or subjective tools like trendlines.
When prices are in a downtrend, defined as a series of lower Pivot highs and lower Pivot Lows, once prices traded above the Pivot high before a lower low downtrend have been violated.
When a Pivot Trend Change Has Not Occurred.
A point that we want to make clear here or reinforce is that within an uptrend - prices can trade below a prior Pivot high that is not Major Support. When this happens, the trend has not changed.
An arrangement of price pivots within an uptrend (HHs, HLs) where prices have made a lower high and lower low but are still above the Pivot low before a higher high (Major Support) - the trend is still up.
Reverse this definition when prices are trending down.
Most charting platforms have a built-in Pivot definition that you can apply to your chart. In your settings, define the Pivot with the number three. The platform will then mark your chart with Pivot highs and Pivot Lows that you can use for following the trend and when the trend changes.
Master Trader and You Building Your Financial Future Together!
Happy trading! If you have any questions or comments,
Please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Dan Gibby
Chief Options Strategist
