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The trending characteristics and capabilities of a stock are the most important pieces of information the price graph has to offer. Look the bottom indicator of any given stock. If you have a your stock chart set for example to view "+Volume" so that a upward close for the day is indicated in green or black and a downward close is indicated by red or white you are looking at a possible trend. A dark bar generally suggests an upward trend (vertical movement up) and a red bar suggests a downtrend (vertical movement down).
You want to look at going long in stocks in which green predominates and avoid or short stocks in which red predominates. If neither color dominates (but rather, a candy cane effect with rapid switching from red to green), that suggests the inability of that stock to make sustained progress in either direction. Unless you are a short-term or day trader (yes Rolling Stocks would fit in here,) you want to avoid stocks that exhibit this non-trending characteristic.
If you receive an anonymous tip for a stock where red dominates, you want to hang up the phone (because the price is falling.) If green dominates (because the price is rising,) listen intently! The reason that Traders go to great lengths to map what MACD is saying on top of the price graph is to provide the clearest, most unbiased assessment of whether a stock trends or does not trend. Trending is the first assessment to make when considering a stock for purchase. Some stocks trend. Others do not. It is far easier to make money in stocks that trend vs. stocks that do not trend. If a stock trends, the bars will appear one color for prolonged periods of persistent price action in one direction.
An up trend in prices is a series of higher highs and higher lows. It's that simple. In the price graph each high takes prices to a higher price level than the preceding high, and each fade in prices arrests itself at a higher price level than the preceding low.
In addition, volume accelerates when prices are climbing, and shrinks when they drop. This is shown on the volume indicator graph by darker volume bars that stack higher than red or lighter colored volume bars. As long as prices do not close lower than the preceding low, the stock is still considered to be in an up trend.
Downtrends are just the flip side. The slow signal must cross over the line below the centerline for it to really count. (Note: You'll learn more about MACD if you don't understand how it works now, you should by the time you read through this Class.)
Any of the same reasons can cause a trending bar to "go down". When a trend goes down, that trend is said to have "stopped out" or "paused". Sometimes the end of the trend is a definitive stop. However, sometimes it could just be pausing (or just catching its breath) before starting another leg of a longer, ongoing trend.
In a downtrend, each decline in prices falls to a lower low than the preceding decline and each rally stops at a lower point than the previous rally. In a nutshell, a downtrend consists of lower lows and lower highs. Stocks rarely go straight down, but rather, descend in a series of downturns. The biggest hint that a stock is in a long-term downtrend (these can go on for months) is the fact that the MACD trend will consist mostly of red. You can tell that this is suspect because prices at the point where the price went up are lower than the peak in price.
You need to pay attention to where a stock peaks. Note the stochastic indicator graph on the bottom. It'll accurately predict the fall and rise of prices. When the stochastic lines cross below the upper reference line (exit an overbought condition), prices tend to fall. When they cross above the lower reference line (exiting an oversold condition), prices tend to rise. Stochastic is covered in detail in other Classes, but note this for the record.
The MACD indicator graph traces curves that as price gets lower and lower down as the downtrend persists. This points out the stock is weakening. MACD is also covered more in detail in another Class, but note this for the record too!
Your first clue to spotting a down trend will often be red bars on price graph, but don't rely solely on these. Don't get me wrong - they give you the heads up on what kind of position you could take, but personally I like a little more reassurance. Call me prudent.
After checking out the MACD bars on the bottom of the price graph, always examine the MACD graph. You see, the graph gives you a more in-depth look at how strong the trend is. Keep an eye on a stock that is trending; take action when a stock is trending hard.
Down trends occur when the blue line crosses over the red. (not always... It also depends on where the crossover takes place. When the blue line rears its ugly head and rises above the red line above the centerline, a downtrend doesn't get signaled until the lines drift below the centerline.) The centerline plays an important role in determining how strong a downtrend is. If a crossover takes place below the centerline, that's a fairly good indication that the stock is indeed in a downtrend. The farther it crosses from the centerline, the better! At least it is if you are shorting that stock.
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