Profit From Prices

A book on stock market trading
By Jayesh Patel, CFA

Chapter 3

Stock price TRENDS

Main (Primary) Trends

Stock prices are volatile and they keep changing almost every moment. Sometimes they seem to go up and sometimes seem to go down. Sometimes they continue an upward movement for many days and sometimes their upward journey lasts just a few seconds! Also there are times when they just move around some price level or within a range as if someone had locked them there. So before learning about Profit From Prices signals, it will be useful for us to understand and define stock price movements.

Normally people think of just two types of stock price movements or trends: an Up-trend or a Down-trend. An up-trend or upward price movement is the one in which the price of a stock keeps going up. A down-trend is a trend in which the price of a stock keeps going down. Besides these two trends, there is another price trend call the SIDE-WAYS trend. During Side-ways, a stock moves around some price level or within a specific range for considerable period of time.

Please look below at Intel’s chart to see how its price is in an overall up-trend during this period. This overall trend that can last from a few months to a few years is called the Primary Trend. However, as we can see in the chart below, there are some periodic down-trends or side-ways movements during this primary up-trend. Such pauses, or minor/small trends against the primary major trend, are commonly referred to as reactionary periods or trends.

Reactionary Trends

Corrections and Reactions are short-term trends that take place within a major/primary trend.

As mentioned above, for a stock in a primary up-trend, there are a few days during which it seems to be going down. This small down-trend (or side-ways trend) within a major/primary up-trend is called a Reaction. Similarly, a small up-trend in a stock that is currently in a major/primary down-trend is called a Correction.

 

"Chart courtesy of StockCharts.com"

These short-term trends can last from two days to a few weeks. These Reactionary trends (Reactions and Corrections) usually are rapid and have lower volumes.

Look at the figure below to see how Reactions/Corrections occur in a stock.

In conjunction with trends, there are two other widely used terms to describe stock price movements: Top and Bottom. These are the turning points at which the stock changes the direction of its trend. Very short term traders or day traders can see trends/reactions and Tops/Bottoms many times over a single day but as PFP signals are based on daily or weekly prices, we will confine our discussion generally to daily/weekly price trends.

 

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