Define the Trend Before Anything Else
The first question on any chart: am I in an uptrend, a downtrend, or a sideways range?
- Uptrend: higher highs + higher lows. Buy dips.
- Downtrend: lower highs + lower lows. Sell rallies (or stay out).
- Sideways/range: highs and lows about equal. Buy support, sell resistance.
Most retail losses come from trying to short an uptrend or "catch the bottom" of a downtrend. Trade with the trend until it clearly changes.
Volume Confirms (or Denies) the Trend
Price tells you what is happening. Volume tells you how convinced the market is.
| Pattern | Meaning |
|---|---|
| Price up + volume up | Healthy uptrend — real demand |
| Price up + volume down | Weak rally — running out of buyers |
| Price down + volume up | Real selling — bearish |
| Price down + volume down | Profit-taking, not panic — may bounce |
| Breakout + huge volume | Confirmed breakout |
| Breakout + low volume | Probably a fake breakout |
A move on tiny volume should be treated as suspect.
RSI — The Momentum Speedometer
RSI ranges from 0 to 100. It measures how fast price has been moving.
- >70: overbought — the move may be overextended
- <30: oversold — the move down may be exhausted
Two important caveats:
- Overbought ≠ sell signal. Strong stocks can stay overbought for months. RSI works best in range-bound markets.
- In a strong uptrend, RSI often "rides" 60-80 — and dips to 40 are buying opportunities, not panic levels.
Divergence — The Reversal Whisper
When price keeps making new highs but RSI (or volume) makes lower highs, momentum is fading even as the price keeps climbing. This is bearish divergence — often an early reversal warning.
The opposite (price lower lows, RSI higher lows) is bullish divergence — sellers are running out of energy.
Divergence isn't a "sell now" signal. It's a "watch closely, the move is getting tired" signal.
Breakouts and Pullbacks
Two clean, repeatable setups:
Breakout
- Stock bases sideways for weeks/months
- Breaks above resistance on above-average volume
- Pulls back to the breakout level
- Resumes upward — entry on the retest
Pullback in an Uptrend
- Stock is in a clear uptrend (above 50-day MA)
- Pulls back to support — 50-day MA, prior breakout, or trendline
- Forms a higher low
- Buyers step back in — entry as it turns up
Both work because they enter with the trend, near support, with confirmation.
Putting It Together
A strong setup has multiple things lining up:
- Clear trend
- Pullback to a known level (MA or horizontal support)
- Bullish candlestick at the level (hammer, engulfing)
- Volume returning on the bounce
- RSI lifting from a moderate (not extreme) level
When several signals agree, your odds improve. When they disagree, wait.
The market rewards patience. Most great traders take fewer trades than you think — they just take better ones.