There are multiples ways to identify the trend of nifty or any particular asset. I will be going through a few of them and update this page as I discover more. Do remember that the trend is defined for a particular time frame. A trend can be in an uptrend in weekly charts and at the same time have a downward trend in 5-minute chart. A good trader uses the both long- and short-term trends to his advantage.
The most basic and the easiest way to find the trend is noticing the price. An uptrend is defined the the general increase in the price. There will be oscillation from the highest price, but the price generally continues increasing. The same way in a downtrend the price continues decreasing with oscillations from their lowest price. This is very basic primitive way of identifying a trend. Example: Real estate prices have been in uptrend in Mumbai.
By looking at charts. An uptrend will make higher high’s (HH) and higher low’s (HL). A downtrend will make lower low’s (LL) and lowers highs. Below is an example of basic trend identification.
By using moving averages. Moving average is a simple technical indicator that filters out the noise from the price fluctuation. The time frame can be minutes to days when using moving averages, you can even plot multiple moving averages with different time frames in a single chart. Traders generally use crossover methods to enter and exist trade using moving averages. When the price of stock stays above the moving average it is considered to be an uptrend, similarly when the price stays below the moving average it is considered to be in a download
Relative Strength Index (RSI)
Relative strength index is a momentum oscillator that is used to track the price changes in a security. RSI can range between 0 to 100 and is displayed on a line graph generally placed below the stock chart. The bands of RSI (generated and known as RSI lines) help determine the strength of the price momentum.
The RSI line runs between the two extremes and determines overbought and oversold conditions in the security. Ideally, RSI is measured over 14 days.
The traditional interpretation of RSI indicates that when any security’s RSI is below 30, it is oversold. There is a better possibility of a trend reversal or a correction at such extreme points.
Similarly, when the RSI rises above 70, the security is considered overbought, and a price reversal or correction may be expected. Some traders even use 25/75 or 20/80 as their oversold and overbought levels for RSI.
Interpretation
RSI near the horizontal line having the value 70 is a bullish signal. In other words, it indicates that the accumulation of sellers in the stock has reached a saturation level, and a trend reversal is on the cards.
RSI near 30 and below is a bearish signal. RSI near 20 It indicates the exhaustion of the downward momentum in the stock as the accumulation of sellers has reached a saturation point. It also indicates saturation of sellers and buyers will be now looking to enter in market.
When the stock is in bullish momentum, the RSI generally stays above 70 and rarely falls below 70. It hits the 80 marks frequently. Likewise, for a stock experiencing bearish momentum, the RSI will rarely hit the 80 marks. It will trade close to 70 and 80 it. But it is also sign of trend ending and reversal is lined up soon.
