Before you enter a trade on any equity, you want to have some idea of how that stock (or index, or exchange-traded fund) can be expected to move. Here, we'll examine a few common patterns to help you identify an equity's trend, and how to help you spot a range-bound stock.

Trends

A stock's trend can be identified in a few different ways. First, by simply eyeballing a daily, weekly, or monthly chart of the equity in question, notice the pattern of the peaks and valleys. Is the stock forming a series of higher highs, punctuated by a series of higher lows in between? This stock is in an uptrend, as its movement has created a stair-step effect on a path higher. The chart of XYZ Corp., below, illustrates this type of movement.

This same pattern, when inverted, can signal a downtrend for an equity. That is, if a stock is forming a series of lower highs and lower lows, it has established a downward-sloping trend. Take a look at the chart of ABC Corp., below:

However, this simple assessment is not the only way traders can identify a trend. A common way for investors to determine a stock's direction is through the use of moving averages. A moving average is simply a trendline that reflects an equity's price movement over a given period of time – whether daily, weekly, or monthly. Since a moving average is calculated from the stock's historical performance, it can often be a reliable indicator of the stock's future direction.

For example, a stock that is ascending along the support of an intermediate- or long-term moving average can often be expected to continue along that path higher. One caveat to keep in mind when using moving averages to spot a trend is that the more times a supportive moving average is tested, the weaker it can become. The same general rule holds true in reverse – the more times a stock rises to challenge a resistant moving average, the weaker that resistance becomes.

Let's take a look at a supportive moving average first. Below, we have an example of 2 long-term moving averages working in tandem to guide a stock on its uptrend. The shares of Business Incorporated have risen reliably along support from their 10-month moving average for a matter of years. The stock's 20-month moving average – which reacts a little more slowly to the equity's movement than its 10-unit counterpart – worked as a backup level of support when the stock experienced a slight pullback. These 2 trendlines underscore the stock's overall uptrend.

On the other side of the coin, these same moving averages can switch roles and act as resistance, thus serving to highlight a stock's downtrend. In the case of Industry Corp., the stock's 10-month and 20-month moving averages have taken on the stock's pattern by forming a downward slope.

Of course, these are just a few examples. Depending upon the type of trade you're trying to execute, you may be better served by analyzing short-term or intermediate-term moving averages to spot your trend. Additionally, you can use different time intervals to target a key entry or exit point in a trade – the 50-day moving average is relied upon by many traders for this purpose.

Trading Range

Now that we've discussed uptrends and downtrends, only 1 type of trend remains: the sideways trend, or the so-called trading range. This pattern occurs when a stock experiences some up-and-down movement, but no definite trend to the upside or downside presents itself. Therefore, while the stock may have a good day where it adds 5%, it could lose 1% over each of the next 5 trading days to end up back where it started.

Trading ranges are not necessarily a bad thing. A stock can enter a trading range as part of a period of consolidation before rallying higher. In fact, this is frequently the case when an equity has gapped above support from an intermediate- or long-term moving average. The stock will edge sideways until its trendline can catch up to its movement, then a boost of support from that moving average will launch the stock higher.

In the example below, Consolidation Ltd. stock experienced a rather meteoric rise during the course of a couple years. The stock's 10-month moving average is tracking that progress, but can't quite react quickly enough to keep up with Consolidation's pace. As revealed by the most recent bars on the chart, the stock has logged its past 4 monthly closes between the 45 and 54 levels. Meanwhile, its 10-month moving average is now approaching from the south, and seems poised to collide with the shares, and could potentially send them on the next leg of their uptrend. As you can see, the stock experienced a similar period of consolidation (or sideways movement) around the 22 level earlier in its ascent. When it finally closed a month close to flush with its 10-month moving average, the equity then found the momentum to chug higher.

However, the sideways trend can also be a terminal illness. Some stocks will languish for years in a channel between 2 key levels of support and resistance. These levels can be represented by round numbers or by moving averages, or they can appear quite arbitrary. For whatever reason, these equities lack the momentum to snap out of their trading range in 1 direction or the other. These are sometimes referred to as range-bound stocks.

Consider the case of Stagnant Corp. The stock experienced a stellar rise in its first years of trading, but then a lack of new buyers failed to materialize. The equity fell, then rebounded as its low price drew more sideline investors into the picture. Then, the stock fell a bit… you get the idea. Over the years, Stagnant managed to slip out of its trading range only to enter a new one, just a bit south of the first. The stock has ricocheted back and forth in a tight channel between the 45 and 50 levels for more than 2 years now.

In the case of Stagnant, the upper rail of its trading range is also loosely defined by its 80-month moving average, as seen below. This double-barreled resistance could prove difficult for the lackadaisical shares to overcome. The kind of long-term aimlessness seen here should serve as a red flag to investors – while there are a few option-trading strategies where you can try to capitalize on a stock's lack of movement, it can be tricky to bet on a sideways-trending equity.