How the Stock Trend Line Affects Buy and Sell Signals

Stock Trend Line

Stock Trend Lines Are The Most Important Technical Attribute

The stock trend is one of five YP Investors technical attributes. In our Stock Selector tool you can see this under the Current Trend attribute. This is the most important technical attribute because it tells you the long term direction of a stock (are the prices trending up or down?) The stock trend also plays a major role in the outcome of buy and sell signals on a point and figure chart.

Positive Stock Trends Improve a Buy Signals Strength

Before we get into the impact of stock trends on buy and sell signals lets first go over what the signals are. Both buy and sell signals are found on a stocks point and figure chart. A basic buy signal is identified on our point and figure charts with a green square. It means there is a high probability the stock price will rise above that buy signal price. A basic sell signal is shown in the chart with a red square. This means that the stock price has a high probability of falling lower than that sell signal price. So a buy signal means prices should rise, and a sell signal means prices should fall.

The stock trend is a major factor in how strong and likely the stock price follows these buy and sell signals. In a Positive Stock Trend a buy signal has a higher probability of executing and has more strength. A higher chance of executing means the stock price is more likely to rise above the buy signal price. The strength is how far the stock price rises past the buy signal. Since strength is increased, the price can shoot up way past the buy signal.

The opposite happens to a sell signal when a stock has a Positive Trend. The sell signal has less probability of executing and the strength is weakened. Since the long term trend of the stock is positive any sell signals will be fighting the trend. It is rare that a stock crosses its trend line, so falling prices in a positive trend stock usually don’t last long. This means sell signals in a positive trend stock are typically noise from the market and the stock will usually reverse to increasing prices soon.

Stocks with a Negative Trend Reduce Buy Signal Power and Reliability

Now that we have covered the impact of positive trends let’s look at how a Negative Trend affects a stock. When a stock is in a negative trend its prices are decreasing over the long term. As its prices rise they are fighting the negative trendline and as they approach the trendline they tend to reverse and fall back down. This behavior is important to note when looking at buy and sell signals.

When a stock has a buy signal with a negative trend it is less likely to rise above that buy signal. Also if the stock price does rise above the buy signal it is not likely to rise too much because the negative trend is working against it. Therefore the strength of the buy signal is weak as well. A stock with a sell signal and a negative trendline has a higher probability of executing and greater strength. This means the stock price is more likely to fall below the sell signal price. It also means the stock price could fall dramatically because the negative trend is helping push the stock price lower.

Stock Trend is the Key to Successful Investing

Before investing or trading you need to take your list of stocks and ask this question for each of them: Is the chart currently in a positive or negative trendline? With a positive trendline the buy signals are more likely to execute and result in higher prices than buy signals with with a negative trendline. This is similar for sell signals. When they occur with a negative trendline the price is likely to drop much lower than when they occur with a positive trendline.

If you only were able to look at one stat/attribute for your stocks, what would it be? The current trend is the answer hands down. This is the direction the stock has been heading and is likely to continue heading. In our opinion at YP Investors it the most powerful indicator available. Be sure to check this on all the stocks you own and any you plan to buy with our Stock Selector tool. It is included with our YP Investors membership. If you are not a member then sign up for a free trial today! Check your stocks now and make sure you are on the right track to growing your wealth!

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