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A Trend is your Friend




This is one more of Wall Street's favorite adages. And there is a lot of truth to it from a trader's perspective. Stocks essentially go up, go down or stay flat. The way they move up and move down can sometimes be very predictable. When a stock moves up, retraces and then moves up again making a new high, it can lead to a formation of an uptrend channel. At the very least, it can form an imaginary support line sloping upward, along which the stock keeps finding support. Whenever the stock approaches this support line, demand overwhelms supply. This causes the price to rise, thus creating a new leg up. As more and more technical traders watch this line and buy into the strength, the line becomes that much stronger. This leads to the analysis that, if in the future the price comes back to this line, the probabilities are extremely high that the stock will start another leg up.

As long as the price does not close below this trend line (same logic for a downtrend line), the stock is considered to be in an uptrend.

This leads to an important question regarding when to take profits. Should one take profit on a confirmed candlestick sell signal, even if the stock has not yet broken its uptrend line or should one wait till the trend line is broken? The anwser depends on the trader's trading style.

If the trader goes strictly by using candlestick signals and is active in adjusting his portfolio to always position himself in high probability scenarios, then he might take his profits when the sell signal is generated and move his capital to other trades. If the trader does not want to actively manage the trades, but is comfortable in holding the stock until the trend line is broken, then that is what he should do.

Notice the chart of POT below. There were a few times in the uptrend showing candlestick sell signals. One could have taken their profits at those times and moved to other high probability scenarios. But a trader who could also have held on with the stop-loss set to be executed on any close below the trend line.

Both are different styles of trading and both would be profitable as long as the trader follows his methodology.

Chart courtesy

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