At this stage of the workshop, it is worth remembering what the purpose of all this trend analysis is - to make money! Identifying a trend simply means having a good idea which way the share price is heading, and that obviously creates a profit opportunity.
The critical thing, apart from identifying a trend correctly in the first place, is to watch out for 'penetration' of the trend. Penetration simply means that the share price breaks a trend line.
It's as simple as that. Except it isn't.
Technical analysis is not an exact science, and you should be very careful about committing serious money on the basis of a few chart indicators - certainly not until you have had plenty of experience.
In general, you should run through the following questions:
Even when penetration is convincing you should refrain from committing large amounts of funds on a hunch that the opposite trend will take hold. You may be caught out by a phenomenon known as a 'pullback'.
In the chart below, the uptrend has been penetrated fairly decisively, but then rebounds to a point which is higher than the price at which the trend line was broken. If you had gone short as soon as the penetration had taken place you would be looking at a loss within a couple of days.
Of course, if you wait for the pullback before you go short in order to maximise your profit then you run the risk that it will never occur and you end up selling short at a disadvantageous price. Some analysts advocate taking up half of your short position as soon as the trend line is broken and the other half when the pullback occurs.
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