Qualifying Trends: A Technical View

By L.A. Little of Technical Analysis Today.

Robert Edwards and John Magee first published Technical Analysis of Stock Trends in 1948. In technical trading circles, this book has come to be known as the bible of technical analysis. It is probably the most definitive book on pure technical analysis as it pertains to strictly reading chart patterns.

In their book, Edwards and Magee define trends. I refer to their definition of trend as the classical definition. In my work, their definition isn't sufficient, and as a result, I have expanded upon that definition with the concept of suspect and confirmed trends. Let me explain.

Trading With the Trend

The classical definition looks at price only when defining an uptrend. For example, an uptrend is defined as a series of higher highs and higher lows based on price. To see this on the chart, here's a recent example of a short-term uptrend on Alcoa(AA Quote) based on the classical definition.

Classic Up Trend ProphetCharts

In this chart, you can see on the left-hand side a series of higher highs and higher lows -- an uptrend according to the classical definition of trend.

Here's the same chart with the downtrend called out. One can easily see a series of lower lows and lower highs.

Classic Down Trend Chart ProphetCharts

Given the generally accepted technical analysis notion that you typically want to trade in the direction of the prevailing trend, then you would want to be long while the trend is higher and short when it is lower. Simple enough, right?