Tip 6: Spikes vs Trends

The world in general and the financial world specifically are dynamic. Things can move fast, especially on a short-term basis, and then suddenly feel as if they’ve slowed to the pace of a snail–to only unexpectedly sprint off again. It’s exciting. It’s boring. It’s everything in between.

In such an area of life as the stock market, it’s good to be able to recognize the spikes from the trends. By spikes, we mean a stock or the whole market may shoot up or shoot down for a short period of time, from a shock like five minutes to fifteen minutes to an hour to a full day to a week. After the spike, however, the general trend continues. By trend, we mean the long term pattern, from a few weeks to over a year, remains steady. The trend can be downward or upward or even horizontal in a basing pattern.

It’s easy to, and tempting to, identify a spike as a change in the overall trend of the stock or the market. Yet, to do so will lead to frustration and loss of capital. Remember, as the old adage says, the trend is your friend.

One tool to help clarify whether a new trend is forming is to zoom out with a weekly candlestick chart. Seeing the broader pattern is likely to give a sense of the validity of a change in trend or if the movement is only a spike. Daily candlestick charts may also help, especially when the time frame is visible over months. Possibly the most popular and free charting program is stockcharts.com. Use it.

When crazy things happen, have patience, zoom out to get a bird’s eye view, and stick to your winning strategy.



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