Identifying Changes in Trends One of the secrets of being a

successful investor is knowing how to identify a change in trend.

When a stock’s price is on a downtrend, you would want to wait for
it to reverse to an uptrend before placing your buy order. Many
untrained investors make the mistake of jumping in too early when
the stock price makes short rallies, only to find that the stock price
plunges even lower subsequently. These short-term rallies are called
‘bear traps’. Chart 3.10: American Express (AXP) 2008 – 2009
Credit: www.thinkorswim.com, ProphetCharts® Buyer: Duc Anh
Nguyen Ngoc (ducanhnguyenngoc14@augustana.edu) Transaction
ID: 3X971665P3039974C WINNING THE GAME Of STOCkS! 77
Is it possible to know when the stock price is going through a true
change in trend instead of a bear trap? While there is no guaranteed
method that works 100% of the time, there are strategies I use that
indicate a very high probability of a change in trend. In this chapter,
I will show you two of the simplest strategies that I use. Similarly, if
the stock you own is making profits on its uptrend, you must know
when to sell to lock in profits once it reverses to a downtrend.
During market crashes, downtrends can last for months and even
years, causing significant losses to your portfolio. In the chart below,
you can see the S&P 500 index reversing to a downtrend in late
2007, when the US subprime mortgage crisis hit. It would have been
a good time to sell and take your profits. Holding on to the stock on
a downtrend would have resulted in all the profits made from 2003
to 2007 being wiped off by the crash. Next, I am going to show you
how to identify these reversal signals. Chart 3.11: S&P 500 Index
2003 – 2008 Credit: www.thinkorswim.com, ProphetCharts® Buyer:
Duc Anh Nguyen Ngoc (ducanhnguyenngoc14@augustana.edu)
Transaction ID: 3X971665P3039974C 78 TECHNICAL
ANALYSIS: READING THE EMOTIONS Of THE MARkET
Using Moving Average Crossovers to Determine Change in Trend
One strategy I use to determine a change in trend is the simple
moving average (SMA) crossover. A simple moving average (MA) is
formed by computing the average closing price of a stock over a
specific number of periods (e.g. days). For example, a 50-day simple
moving average (50 DMA) is computed by adding up the closing
prices of the last 50 days and dividing the sum by 50. As its name
implies, a moving average is an average that moves. Old data is
dropped as new data comes available. This causes the average to
move together with the stock prices. Moving averages smooth the
price data to form a trend following indicator. They do not predict
price direction, but rather define the current trend direction. The
chart below shows the 50 DMA line that can be drawn by any
charting software