What Is Inflection in Trading?

by Jake Costa, Demand Media
    It's not always easy to define an inflection point.

    It's not always easy to define an inflection point.

    When traders talk about "inflection," they're not referring to your tone of voice. The term "inflection point" refers to the change in the curve of a graph. Although the formal definition can get a little complicated, the term has been adopted by many fields, including trading, to refer to the point at which a trend makes a U-turn or accelerates in the direction its going.

    Inflection in Trading

    In the context of stock trading, an inflection point is a game-changer in terms of how a particular stock or the market in general is moving. Like a swing in moment in a football game when the losing team looks like it make a comeback, inflection points mark the beginning of fundamentally different behavior for a stock. That could mean jumping higher or falling much lower. They are watched carefully by traders who base their investment strategies on technical analysis. Technical analysis seeks to predict future stock prices by looking at historical prices, trends and trading patterns, rather than evaluating a company's balance sheet or earnings reports.

    Upper and Lower

    Technical analysts will look for upper and lower price limits on a stock's trading price. Technical traders will often say there is "resistance" at the upper bound of a stock's price when it has difficulty rising above that price, and "support" at the lower bound when it has difficulty falling below that point.
    For example, if a stock routinely reaches $99, only to fall again, technical traders will say there is resistance at $99. Likewise, if a stock never falls below $50, or only dips briefly before quickly rising above that amount, traders will say there is support at that level. When a stock chart breaks out of its historical range, it may be an indication that the stock will continue to move in a dramatic way.

    Technical vs. Fundamental

    Interpreting trading patterns is only one way to evaluate stock prices, and it isn't necessarily the most reliable. Technical analysts look for inflection points because they believe investor psychology is a big, if not the biggest, factor determining stock prices. Other traders look at a company’s "fundamentals" such as its balance sheet and earnings reports. Fundamental analysts believe looking at the company itself, rather than the trading behavior, is a better way of trying to predict its future price.

    Considerations

    Figuring out whether a stock or the market in general has reached an inflection point is difficult. A stock that has shown resistance at $100 a share might rise above that level for a brief period, only to settle back down into its historic trading range. Technical analysts often have different opinions on whether a stock will rise or fall. Ultimately, inflection points are only obvious after the fact.

    About the Author

    Jake Costa has been a reporter and editor since 2003. Among other topics, he has covered business, finance, science, technology and the environment. He has written for "The Financial Times," Environmental Leader, "Latin Finance" and Sybase. He has a Bachelor of Arts in literature from the University of Michigan.

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