Let’s analyze the following image of Jubilant Foodworks. Apart from Swings, a human eye can easily differentiate peaks and troughs.
The stock was in clear uptrend as the peaks and troughs are consistently closed above the previous peaks and troughs except in the middle of December where the Swing Low broke the lowest point of the previous Swing Low decapitating the definition of an uptrend.
But it was a false breakdown.
It quickly shot above (closed higher than) the last Swing High and resumed the uptrend. Many traders short at trend reversal i.e. when the trough was broken with a stop loss at the previous peak. In this case, it would make a loss.
This shows why stop loss is so important. The Market shows deception!
But the point is – The stock is considered to be in an uptrend so far. These kinds of false breakdowns and false breakouts happen when there is a fundamental event. Unpredictability makes people irrational. People’s irrationality gets induced to the price!
When a stock is in an uptrend; traders buy on troughs and sell on the peak. Many investors keep averaging a bullish stock in their holding in every trough.