The up and down trends in the progress of price activities in all securities are called peaks and troughs. The term zigzag pattern usually describes these trends. Various chart software that recognize and analyze peaks and troughs use %-zigzag to indicate the pattern in the chart.
It’s easy to spot the trend of an escalating peak-and-trough in the chart. You just have to look at the higher tops and higher bottoms which create an upward or downward trend. The other method to find the trend is to look at the new tops created as the price progresses. Compare those new tops to the previous ones from the past days, weeks, or months. The same thing goes with the troughs. You can look for fresh bottoms and connect it with the previous ones in the same period you’ve used in the peaks.
The chart above shows the data from the PepsiCo Incorporated (PEP). The blue upward arrows indicate the ascending bottoms and the red downward arrows shows the tops of the trend. During the mid-December 2001 until the 3rd week of April 2002, the equity price fluctuated from 46.50 to 53.50 dollar scale, a movement equivalent to 15 percent, not including commissions.
The next chart shows the trend data showing the price movement of Nortel Networks Corp. (NT). Starting from December 2001 until the closing of June 2002, the arrows indicate the downward movement of tops and bottoms with new records from the pattern from the previous price movements. The decline shows a price range of 9.25 to 1.50 dollars.
How to break down the trends?
To know if the trend is broken, you have to look at the breakdown and replacement of ascending or declining tops and bottoms. With the chartist’s trust on the psychology of the analysis, many technicians still favor this indicator than other trend-reading methods. The confidence of investors to the future of a certain issue moves the prices of equities, and the lack of an optimistic outlook drives it downward.
Remember. . .
The study of the trend cannot be applied in a short period of time. The analysis of peak-and-trough consolidation will take 33-66 percent of the time range of the previous trend before it finally plays out. However, an experience is still better than this rule. Don’t let this be replaced by the instincts and knowledge of a veteran investor.
The peak-and-trough method must also be used especially when times get rough and when the market gets into rock bottom. Investors must study the strategy well during the tough times and combine it with the moving average indicators, and then start to seek for the possible turnaround for the beaten up issues. However, avoid the mistake of using a short-term time frame. Peak-and-trough can only take effect in the span of months or weeks and just for days and hours of trading sessions.
Don’t forget that the price trend is formed by the upward and downward movements. The time range of inclining and declining peak-and-trough must also be considered to measure the value of the trend. Finally, investors’ level of confidence to the issues will strongly drive the price trend more than any indicator.
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