Trend Direction for Better Stock Selection
Navigating Japan’s train stations are often like walking your way out of a mini suburb. Ikebukuro is one of the top 10 busiest railway stations in the world. Finding the way out of this expansive station to my apartment had a lot to do with heading in the right direction. In this case it was West (central) as opposed to West (south) or the multitude of other exit options.
Finding the trend direction on a chart is a lot easier.
Two stocks in my portfolio were doing well and I wanted to purchase more of the stock with the higher potential of moving up over the short-term.
Deciding on the better opportunity between Patriot Battery Metals Inc – PMT and Azure Minerals Ltd – AZS using the GMMA trend indicator, made the selection of the better stock to trade an easier and more obvious choice.
Choosing the Higher Probability Trade – PMT vs AZM
Consider the following daily charts of each stock.
Figure 1 PMT
On the daily chart of PMT, Figure 1, the short-term trader group sat below the long-term investor group in a GMMA downtrend order. Traders were beginning to buy the stock as the short-term moving averages were beginning to move up. Support from investors for the downtrend was weak as the moving averages of the long-term group were thinly compressed. There was a small possibility of price breaking up through the long-term GMMA but overall, this was an uninspiring set up for a high probability trade.
Figure 2 AZS
On the daily chart of AZS, Figure 2, the GMMA signalled a very strong uptrend. The GMMA uptrend emerged back in April from the tight compression of the short-term and long-term moving average lines.
Wide separation of the moving average lines in the short-term and long-term GMMA groups indicated good support from both traders and investors. The wide gap between the groups was a signal of solid trend strength in the general uptrend.
An extended trend like this requires some degree of caution. The potential trade becomes a higher risk one compared to for example, a GMMA uptrend where the short-term moving average lines pull back and bounce off the long-term group a few times as part of the natural trend flow.
AZS was clearly the strongest chart, showing a clear direction to the upside and greater potential of further upward price movement. An entry was made at $1.985 with an ATR stop loss of $1.52 and a target profit of $2.58.
Figure 3 AZS
Price moved up after entry then gapped up on positive news. A spike in price action on a day like this where the target profit was achieved intraday was a good opportunity to close the trade and lock in profit. The trade was closed for $2.58 with a profit return of 30%.
Let’s return to the chart of PMT and observe the price action over the same time period.
Figure 4 PMT
A trader taking the PMT trade saw price break through the long-term GMMA and spike on the day of entry to 1.82.
In the days following, price fell back down through the long-term GMMA, resumed the downtrend and moved downwards triggering the ATR stop loss. This trader stopped out at 1.40. It was not an opportunity for a profitable trade as analysed earlier in this article.
The overall trend frames the direction of where price has been heading and is more likely to continue in the near future. It is useful for traders including those who are trading long, trading short, increasing position size or reducing position size. Building on this foundation, other indicators may be added to the analysis.
Trend identification helps extract the better opportunities for any strategy. Better trading starts in the right direction. The better exit from Ikebukuro station to getting back to my apartment sooner was in the direction of West (central). Whether navigating or trading, the wrong direction may cause confusion. Choosing the correct direction is more likely to end in success and at the intended destination.