When a scrip makes higher highs and higher lows; that scrip is considered to be in uptrend.
But as discussed in the definition of swing high, the terms “higher highs” or “higher lows” are relative to another candle i.e. This candle A has higher high than candle B. So what does higher highs and higher lows means in case of a scrip? – It’s probabilistically impossible to get a perfect uptrend where the candles keep making higher high all the time. Right?
In the above chart of PC Jeweller, it is quite evident that the stock can be considered to be in an uptrend but this is not an uptrend as per our classic definition. It was so bullish that it ended green straight nine days but in middle of that bullish momentum, the marked candle’s high is not higher high than the previous candle i.e. it previous day’s high is more higher.
Now ,classifying a stock’s trend becomes dependent on people’s perception as the definition itself looks perceptive i.e it is not mathematical ,like 1<2 but it is based on slight speculation. To remedy that, concept of peak and trough kicks in. Rather than checking if an uptrending scrip is in still in uptrend, it is easier to check that if that is not in uptrend anymore.
Peaks and Troughs are the resistance and support lines of a scrip. All Swing Lows are Troughs and all Swing Highs are Peaks.
False Breakdown on Uptrend
In the following image of Jubilant Foodworks, the stock is 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 uptrend.
But it was a false breakdown. (Breakout means upside and Breakdowns means viceversa!)
It quickly broke up (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 (also known as ‘Newton Method’). This shows why the stop loss is so important. The Market shows deception!
But the point is – The stock is considered to be in uptrend so far.
When a stock is in an uptrend; investors buy on dips and sell on the peak in a perception that the stock will rise further. Many investors keep averaging a bullish stock in their holding in every higher low.
Then comes the concept of trend lines – Lines connecting the higher highs and higher lows! The two trend lines hence formed is called a channel where the trend line connecting higher highs is called resistance line and the trend line connecting the higher lows is called the support line.
There are some cases where the peaks or troughs are not swing highs or swing lows all the time. It made consolidation creating a support and resistance followed by another breakout making the resistance a new support.
In short, this definition of Uptrend and the pattern developed here is called HTHB (Higher top higher bottom) pattern. In case of Downtrend, it is LTLB (Lower Top Lower Bottom) Pattern.
Here goes an interesting example of PC Jeweller where the swing low (marked with red arrow) is formed just after a swing high (black line) is formed –
PC Jeweller has broken the uptrend as of now with yesterday’s red candle breaking the last swing low! How should this event impact on a trading decision of a trader? This question has led to several conclusions impacting various popular strategies.
But scrip is considered weak and in a conservative approach, it is not recommended to keep open or initiate a long position if there is no uptrend.