Identifying Uptrends
Identifying Uptrends
An uptrend is the most favourable condition for an investor who owns or wants to buy a stock. It means the stock's price is generally moving higher over time. Understanding how to identify an uptrend on a chart is one of the most valuable skills you can develop.
The Pattern: Higher Highs and Higher Lows
An uptrend is defined by two characteristics:
- Higher highs — Each peak in price is higher than the previous peak. The stock keeps reaching new highs.
- Higher lows — Each dip in price stops at a higher level than the previous dip. Even when the price pulls back, it does not fall as far as before.
This creates a staircase-like pattern moving upward and to the right on the chart.
Drawing an Uptrend Line
You can visualise an uptrend by drawing a straight line connecting two or more of the higher lows. This is called a trendline. As long as the price stays above this line, the uptrend is considered intact.
- Identify at least two significant lows where the price bounced upward
- Draw a line connecting these lows and extend it to the right
- If the price respects this line (bouncing off it multiple times), you have a valid uptrend line
NSE Examples
Historically, Safaricom (SCOM) showed a strong uptrend from 2013 to 2017 as mobile money revenues grew rapidly. On the chart, you would see a clear pattern of higher highs and higher lows. Similarly, Equity Group (EQTY) has demonstrated uptrends during periods of strong earnings growth in the banking sector.
What to Do in an Uptrend
- Buy on pullbacks — Wait for the price to dip toward the trendline before buying, rather than chasing the price at its peak
- Hold your position — As long as the pattern of higher highs and higher lows continues, the trend is your friend
- Watch for breaks — If the price falls below the trendline and makes a lower low, the uptrend may be ending