At its core, Sherman Research has always been based on trend-following as the foundation for our indicators and portfolio selections for each model. At its most basic level, every instrument can be categorized as being in an “uptrendGlossary: An uptrend is a price that keeps making higher highs and higher lows over months; a downtrend is the reverse. A common test is whether the price is above or below its long-term moving average.”, a “downtrend”, or “consolidation”. An uptrend is defined as “a series of higher highs and higher lows”.
Ideally, an uptrend line is constructed by connecting the first low with the first bottom of the rally as shown below. It’s important to remember that uptrends are always drawn connecting a series of troughs, while downtrends are always drawn connecting a series of peaks.
In the case of a primary trend, this would be the first bear marketGlossary: A fall of roughly 20% or more from a recent peak, usually over several months. low and the first intermediate bottom shown below.
However, the markets are often not so simple. Here’s a more realistic example of what you might expect. A rally that begins similar to the above but then accelerates. In this case, it would be better to use point B as the beginning of the secondary trend and the next trough to track the accelerating momentumGlossary: The tendency of a price's recent trend to keep going, usually measured by its returns over the past several months. Positive momentum means it has been rising faster than its peers; negative momentum, falling faster.. A signal to sell or at least take some profits off the table occurs at the break of the trendlineGlossary: A line drawn across a series of price highs or lows on a chart to show the direction prices have been moving. A clean break through it can signal the trend is changing. at point C.
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