Telling a trend from noise
Intermediate · 2 min
Trend lines and moving averages both describe what has already happened.
Two tools do most of the work, and both work the same way: they summarise where the price has already been, in a form easier to read than the raw chart. Neither looks forward. Knowing that is most of what protects you from them.
Drawing a trend line
In a rise, draw a line along the bottom of the moves, joining the low points. In a fall, along the top, joining the highs. Two points make a line; three make it worth looking at. While the price stays on the right side of that line the pattern is intact. When it closes through, the pattern you were relying on has stopped describing the share.
What a moving average adds
A trend line is your judgement about which points to join, so two people draw it differently. A moving average is arithmetic, so it says the same thing to everyone. A common one is the 50-day: while the price sits above it and the line itself is rising, the share has been climbing for a while. That is a description, not a signal.
- MACD
- Moving Average Convergence Divergence. It subtracts a longer moving average from a shorter one, so the result grows while recent prices pull away from older ones and shrinks as they close up. In plain words, it measures how fast a move is going, not where the price is.
Reading a 50-day average on a ₹450 share
- Price today
- ₹450
- 50-day moving average
- ₹412
- Price is above the average by
- ₹38, about 9%
- The average line itself
- rising for six weeks
This says the share has been climbing for a while and is currently well clear of where it has been sitting. It does not say the climb continues. A share ₹38 above its average can carry on, or fall ₹38 and be exactly average again. Both happen often.
Try this in the app
- Research — open a share and look at its chart
Share this lesson
Works with
- When the KDJ indicator misleads you — KDJ reacts to every wobble, so most of its crosses are noise — here is how people decide which ones to ignore.
- Letting the trend go first — Ignore KDJ crosses against a strong trend until the price breaks its trend line.
- Making a hammer believable — A hammer at a price the share has turned at before, on heavy volume, says more than one in empty space.