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How to Follow the Trend?
One thing remains consistent over the many years that I have assisted traders and investors; that is the confusion in understanding trends. What constitutes a trend? Where does it start? At what point should I buy and sell? And lastly, how do I draw a trend line?
The concept of trends is the simplest and most effective way to trade or invest safely, whether you are a novice investor or an experienced trader. However, what I find is that many traders try to complicate their trading by adding more tools and rules than they know what to do with. The end result is confusion and ineffective trading.
Charles Dow, the father of technical analysis, and who the American Dow Jones index is named after, refers to trends in these simple terms. An up trend must have higher peaks and higher troughs while a downtrend requires lower peaks and lower troughs.
To the day trader an up trend means that the current daily bar must have a higher high and a higher low than the previous daily bar to indicate an up trend.

Notice the second bar has a higher high and a higher low
To the day trader the downtrend is exactly the opposite of the above.

Notice the second bar has a lower high and a lower low
To the medium to longer-term trader, this would mean a higher peak and a higher trough than the previous peak and trough measured on a weekly bar chart. This may take place over several weeks or even months. Example 1 below illustrates this.
Example 1 reflects a typical up trend pattern as espoused by Charles Dow. To make a higher peak you must have a movement up in price followed by a down movement in price. This is achieved by having a series of successively higher bars that lead to the peak, followed by a series of successively lower bars that fall away from the peak.
To make a trough you need to have a down movement in price followed by an upward movement in price. This is achieved by having a series of successively lower bars that lead to a trough, followed by a series of higher bars that rise up from the trough.

These patterns can unfold on a daily, weekly or monthly bar chart. You're trading plan and time frame will dictate how you trade this pattern.
The inverse of an uptrend is a downtrend; that is lower peaks and lower troughs. Your investment time frame will tell you when you should enter or exit a trade. Assuming you are using the theory that you want to buy a stock that is trending up, then you would buy the stock the moment it fills the rules of an up trend. That is, you would buy the moment you have a higher trough followed by a higher peak. This would be the point at which the stock trades one cent above the previous peak after forming a higher trough. Example 2 below illustrates this.

In Example 2, the stock made a higher trough and then it rose in price above the high of the previous peak. The moment it does this the stock is said to be in an up trend. According to the Dow Theory you buy the stock at the earliest probable time that it is in an uptrend. Based on my experience, if you are trading shorter time frames, for example a number of weeks, then this theory will work well.
However, for the medium to longer-term trader you will notice during the long up trend of a stock, that the pattern illustrated in Example 2 is repeated several times over a matter of months or even years. Thus, a longer-term investor or trader would only want to get in at the first sign of a new up trend forming so that they are in a position to profit for the duration of the long term up trend. Obviously, you would not want to get in near the end of the up trend. So, how do we define which is the start of a new longer term up trend and the end of the up trend.
This is where we look outside of Dow's Theory to W D Gann and others. Gann states that a counter trend is 1 to 4 bars or 7 to 11 bars. For those of you who don't know, a counter trend is a movement in the opposite direction to the prevailing trend. As illustrated in Example 3 below, we have a stock that has 5 bars (daily or weekly) moving the price in one direction (which could reflect the beginning of a new trend) followed by a movement of two bars in the opposite direction. From this point the stock turns and moves down in price in the same direction as the original 5 bars. Once this happens we can assume that the two bars that moved opposite or counter to the original 5 bars was in fact a counter trend, with the original 5 bars part of a newly formed trend.

The trend itself, however, must fall outside the parameters of a counter trend. This means that if a stock has been rising and/or falling for more than 11 bars then it is considered to be in a trend. If it has only raised 3 bars then it is quite possibly only in a counter trend or movement counter to the trend.
The additional countertrend information you gain from your charts will assist you in assessing a trend when using Dow's theory of higher peaks and troughs for up trends and lower peaks and troughs for down trends.
For the medium to longer term trader you also need to incorporate trend lines so that you only buy when a stock changes from a downtrend to an up trend. Therefore, you need to define the parameters of an up trend. To do this you start at a peak in the price and then look for successively lower peaks and troughs. You should be able to identify from this that the stock is down trending. Now you get out your ruler and pencil, and draw a line across the peaks of this down trend; you need two or more peaks to make a straight line. I prefer three peaks as a minimum because with only two peaks it is considered an unconfirmed trend line. Example 4 demonstrates this for you.

The trend line gives us the comfort of knowing that there is a resistance in price when a stock reaches that line. When a stock is below the line you should not own it, as it is in a downtrend and has a high probability of falling further. However, when it breaks above the trend line then we know with higher probability that the trend is most likely changing from down to up. Rules of entry here vary from trader to trader, however, it is generally accepted for medium to longer-term traders that when a stock has two weekly closes above a trend line this constitutes a buy signal. Similarly when the stock has two weekly bars clearly above the trend line this gives the same signal. For the short-term trader, you would perform this exercise on a daily chart with the buy rules being daily not weekly, while for the longer-term trader it is always done on a weekly chart. When exiting a stock your trend line and exit rules are exactly the same only up side down. By this I mean that the stock needs to be in an up trend, and have an up trend line touching the troughs of the stock. Once the stock closes twice below the trend line then you can sell. Below are graphs of actual stocks to demonstrate when to buy and sell using trend lines 

Disclaimer: The information contained in this report is based on factual information about securities and securities markets only. It should not be assumed that the methods, techniques or indicators presented will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. The information contained herein does not involve any recommendations in relation to your personal financial circumstances or investment needs and does not provide any investment advice. Examples presented are for educational purposes only. Any stocks, options, warrants or futures mentioned are not a recommendation to buy, sell or hold but merely a study of past performance. Before making any investment decisions you should obtain independent investment advice. Park Avenue Consulting and its representatives and officers will not accept liability for any loss, damage or expense incurred or suffered by you if you rely on any information provided in making investment decisions.