May 8, 2008
Trends are often what we look for when finding a stock to trade in. For those who depend on technical analysis solely for their trading decisions, it is their life-blood. Knowing where big money is putting there money in, is often found by spotting the trend early and riding it to maturity. So what constitutes a trend? By definition it is a series of “higher-highs” and “higher-lows”. Between the two it is imperative that the trend continues to make higher-lows at all costs. A trend can continue if, from time-to-time, it makes a lower-high. However, once the stock fails to make a higher-low, the trend is considered “dead”. That is only one side of the coin, trends exist to the downside also (obviously) and downward trend is defined by a series of “lower-highs” and “lower-lows”. The same rule applies, in that once the stock fails to make a lower-high, and instead makes a higher-low, then the trend is considered over, and the short position will need to be covered. But for the purposes of this article, we will only focus on the upward trend.
Let’s look at how to trade the trend…
This is the chart of Agrium Inc. (AGU) one of the very popular agricultural stocks, but in August of 2007, it had been trading in a sideways for over four months between $36 and $46 per share.
But by late August, AGU broke out of channel and went past $50/share and all the way up to $75/share before pulling back to around $50/share in late-January (this was also during the same time as the general market decline which saw losses of over 10%. AGU managed to find support near the 200-day moving average and consequently put in a higher-low at the same point. The yellow-line drawn from mid-August to late-January connects the two higher-lows and the creation of the long-term trend line.
The long-term upward trend line continues through the publishing of this writing and has since put in three legitimate higher-lows. Note also, that after the second higher-low, AGU did not manage to establish a higher-high, instead it pulled back to the long-term trend line where support was tested successfully before going on to all-time highs.
When will AGU stop the bull-run that it is currently on? Who knows! At this point you continue to hold your position in this stock until it either 1) breaks the trend line, or 2) creates its first lower-low. At that point, you will have for yourself a clear signal to take profits. Remember, when you are on a run like the one shown with AGU, its best to let your profits run wild. Never sell a stock that is still winning for you; you only sell it, once it has shown to have broken down technically, and the upward trend line that it rode, no longer holds. Continue to check back in at the Education Center as we provide more and more ways in fine-tuning your trading strategies, and therefore making you become a better trader.