How to detect trend change

March 2007

Written on 06-03-2007 9:27 am by Craig
How to Identify a Change in Trend - Easy as 1-2-3

In the book Trader Vic - Methods of a Wall Street Master, Victor Sperandeo mentions three rules for correctly identifying a change in trend. Here they are as follows:
Step One: The Trend Line Break

The first thing that you want to look for is a trend line break on a correctly drawn trend line. The trend has not changed yet. This criteria gives you a heads up on a possible change in trend.



trendline
Step Two: Retest and Failure

After the trend line has been broken, the stock will rally but fail to move above the prior high. The trend has not changed yet. We still need one more criteria to confirm the change in trend.



trendline
Step Three: The Confirmation

Finally, the stock moves below the prior swing point low and the change in trend is confirmed.



trendline

This example is for a stock that is moving into a down trend. The rules are just reversed for a stock that is moving into an uptrend.

Also, here is a quote from the book:

If two out of the three conditions are met, the chances are good that a change in trend will occur. If all three conditions are met, the trend change has occurred and is most likely to continue in its new direction.

These rules won't work 100% of the time, but I think you will be impressed by how often it does work. Pull up any chart and test out the rules. See if you could have anticipated a change in trend. Also, try it out on weekly charts and intra day charts.

Now I just need to figure out how to identify a change in trend with my wife's mood swings. THAT would be impressive!