Trend Trading: Follow The Momentum, Make The Money
There are several different methods of investing in stocks and trading in stocks. One popular tactic is trend trading of stocks. Many people use this kind of stock trading, for example investors who see trends as beneficial sources of profit.
As with any investment strategy, here too the trader should select a stock or a group of stocks to focus on. For this, factors such as the market movements and trading volumes are taken into account. After selecting a particular stock, its price movements are analyzed. The price of the stock should move in a particular direction successively over a period to qualify as a trending stock. For short term trend trading, the period may be in days or weeks and for long-term investments, it may be in months or years.
When examining price movement in trend trading it is important that it display momentum in a particular direction. The direction need not be only upwards, it can be either up or down as long as it is a continuous trend in one direction. The expectation is that the price of a stock, which has trended upward for a few days, will continue to go up over the next few days. While if the trend is downward, the momentum should continue downward.
After the trend in a particular stock is identified, you can purchase the stock at the current price and hold it for the duration of the trend. When the upward or downward trend reverses direction, the stock should be sold without much delay. You should not continue to keep the stock even after the reversal there is a risk of not realizing the notional profits, not to mention the chances of actually incurring losses.
In addition, you should always stick to your chosen time frame while trend trading. If you buy a stock that is trending up on a monthly basis, you need to check only its monthly performance. You can do this by tracking its monthly closing prices. If it drops in price within the month, you can ignore this. Although the price may fluctuate weekly, pay attention to the monthly trend. Similarly, if you buy a stock that is trending up over the past weeks, ignore its daily fluctuations and pay attention to its weekly closing price.
Trend trading isn't just for short term traders. If you are investing in stocks for longer amounts of time, even months or years, you too can use this method of stock trading to your advantage. Short term or long term traders alike can benefit. However, this form of trading requires you to monitor the market continually if you want to see results. If you are the sort of person who buys a stock and then forgets it because of other occupations, this kind of trading is not for you.
Trend trading is an aggressive way in which to invest in stocks. A trend trader should focus his attention on the price movements of one or several companies over a period of time. Once he has established the trend of the stock's price, he should then begin trading so as to capitalize on its momentum, and should be prepared to sell his position as soon as the trend reverses. While this is usually a short-term method of stock trading, using trends can also be effective in investing in stocks over periods of weeks, months, or longer.
Published June 28th, 2007
