Make the trend your friend is perhaps one of the most common investment advice.
The trend, in fact, plays a very important role in financial investment.
You can either follow the trend or buck the trend.
No wonder trend investing is one of the most common types of investing strategy.
The simple explanation of trend in the financial world is the direction of the market.
The market goes up, down, sideways, range bound.
Surprisingly each of these is a specific trend in the market.
Often the entire growth is trend-oriented.
No wonder you have a host of techniques and analysts looking for the right trend.
Trend investing, as a result, emerges as the most popular way to profit from trend analysis.
These trends can be long-term, short-term or even medium term.
It totally depends on the type of market that you may be trading in.
There are many factors impacting the trend.
From economic decisions to corporate earnings, there are many catalysts affecting the trend.
It is important to maneuver your investing plans as per these trends for the best results.
Often trend investing is a strategy that’s used to cut losses or even exit markets.
This strategy predominantly aims to fashion trend as per the broad market directions.
Analysts don’t predict any specific price levels.
They simply identify the direction and investors ride in that direction.
Normally the trend also dictates your market entry.
Most will wait for a trend to settle down before entering the market.
Contrarians, on the other hand, will use the trend to determine how and when they can go against it.
So broadly any type of market movement is deeply rooted in the broad trend.
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Defining Trend Investing
The simplest definition of trend investing is, therefore, looking at the trend for deciding trade.
You are in a safe investing zone and also making money.
That makes you confident about the market, and you feel that you are ahead of the curve.
This particular way of investing is heavily based on gauging the momentum appropriately.
So based on the trend, an investor will go long when the momentum is pointing north.
The reverse happens, and shorts trades are created when the momentum goes down.
The assumption is often like Newton’s law of inertia in this case.
Traders feel that the market will continue to move in a specific direction and offer stop losses before a reversal happens.
This is possible without taking into consideration any specific time period.
Trend investing is possible for long-term as well as short-term.
Though the reversal will happen at a different time for the different duration.
It totally depends on the overall duration and extent of momentum that you want to harness.
This entire trading format is a pretty modern concept in comparison to the history of trading.
You can trace its origin to 1980s after the success of Richard Dennis and Bill Eckhardt’s unique trading strategy.
They taught this strategy to a small group of traders that they created, the Turtle Traders.
This particular trend investing strategy amassed more than $100 million in profit.
Though earlier history indicates a strong correlation between trend investing and commodity trading, it is common across financial tools.
The profitability element is the cardinal decider for this specific investing strategy.
If you ask a trend trader, there is nothing as sacrosanct as the trend.
For many, this is the most decisive trigger for the markets.
In many ways trend investing stands out as the key growth catalyst.
Strategies for Trend Investing
Now if you have a specific kind of investing, a strategy has to follow it.
Trend investing is all about price discovery.
Whether the price will go up or down, that is the final aim.
There are many different strategies that are employed to identify just this basic fact.
Whether you are long on it or short, if you are investing, you need to take this basic factor into consideration.
The different strategies are also important in helping to time the market more accurately.
Are you there too early or are you already late?
The time along with the price plays a crucial role when you want to invest in the trend.
The trend waits for none.
The idea is to anticipate the trend and stay ahead of the crowd.
That is perhaps the most effective way for booking profit in the financial world.
It is not just a strategy to help your investment grow, but at the same time, this also gives direction.
Often the biggest challenge is not deciding where to invest but more importantly when.
Trend investing strategies guide you to find out exactly this when.
So, in many ways, identifying the trend empowers an investor in terms of taking meaningful market decisions too.
But there is no one way of deciding the strategies.
Every market analyst and trader rely on what they are most comfortable with.
Frankly, your strategy may be as effective as mine.
Your unique way of investing also plays a crucial role in it.
But that said, there are some basic strategies that almost all market players employ.
Here is a quick look at the top trending strategies to identify the trend.
Sometimes traders may also use a combination of some of these.
Remember the ultimate target is profitability.
Moving Averages to Identify the Market Trend
Whether you rely on technical analysis or fundamental views, it is hard to ignore moving averages.
There is a reference to them if the stock is rising, there is a reference if it is falling.
They are undeniably the most tracked market data.
But the question is what exactly is the moving average and why do you have to track it?
The moving average is essentially a technical tool that smoothens out price action.
This constantly updates the average price number over a specific period.
The moving average can span over 30 days, 50 days, 200 days.
Basically, it can be any period that you deem is important to understand a trend.
At any given point, there are myriad of signals in a price chart.
But the moving average is the single most effective tool that helps to clean out the unnecessary stuff.
These are essentially price points where the specific stock or currency has either experienced resistance or support.
That means crossing the moving average often starts off a brand new trend.
For example, a certain moving average may be a resistance level for a stock.
Once the stock breaches this specific resistance, you can be confident about a new trend starting.
Further upmove is expected beyond that point.
The reverse happens if it slips below the support zone.
It means there is a risk of further downturn in the specific price action.
The moving averages can be determined for the short-term as well as long-term.
As a result, this can impact the overall momentum in the trade and also help you identify the trend.
For a trend investor, these levels, therefore, become important indicators to understand the broad trend.
It often triggers long-term trading strategies that impact markets.
What Are Trend Lines?
This type of trend investing is closely linked to the support and resistance levels we discussed earlier.
In this case, you go long when a stock is trending higher, i.e. follow the trend.
But you also create a stop loss just below the support zone.
So in case, there is a trend reversal, you can contain your losses.
The key consideration here is using the trend to limit losses.
Capital preservation or preserving profit is the ultimate objective of this trend strategy.
The moment a stock reverses the trend, you can easily exit and safeguard your profit.
Often a breakout from the trend line or a breach of the trend line kicks off a fresh trend.
This can be with regards to a specific security or the market as a whole.
So identifying the appropriate stop loss point is one f the most important aspect of this strategy.
But you have to keep in mind that this strategy is never used in isolation.
It is always used in conjunction with another strategy.
This is more of a means to determine the broad trend.
It never predicts the trend on its own in a conclusive manner.
It can be used with both moving averages and momentum indicators.
Trend lines, in fact, are some of the most important tools to clock meaningful market gains.
The other key tool for determining the trend for investing is momentum indicators.
As the name indicates, this identifies the broad momentum in the market.
Normally these strategies are used to identify the entry and exit points in a trend.
If the specific stock is trending with strong momentum, you can create long positions.
If the stock suddenly loses momentum, it may be the right time to short the stock.
Needless to mention the RSI or the relative strength index plays a crucial role in determining the momentum.
It also helps you to determine if a particular security is in overbought or oversold zone.
You can either use it to go long or short on a particular counter.
For example, based on the momentum indicators, a specific stock may be oversold and a bounce is likely.
Now what you need to do is go long on it now and wait for future gains.
The other option is if the stock is overbought, you place a short position and wait for a further downturn.
If you notice in both cases, you are anticipating the potential trend that may ensure.
Therefore one fact is simple and clear, a trend is never definite till it actually plays out.
The trend is an assumption based on the rice action.
There is always a risk of it not panning out exactly as anticipated.
It totally depends on several other factors.
Remember at any given point a trend is never determined in isolation.
Though these strategies are some of the most common, many other factors are affecting the broad trend in the market.
The strategies and their success are directly linked to them.
Key Considerations for Trend Investing
If you are contemplating trend investing, understanding what affects the trend is crucial too.
Several considerations go on to determine the success of this trading approach.
You have to remember that there is a fine line between assumption and reality.
The question is to determine how to decide where to stop.
If trend alone could help the markets, then there would never be any mayhem or bloodbath on the exchanges.
The problem is sometimes investors may go overboard in trying to identify the trend in a precise manner.
1. Pricing Is Most Important
Remember the current price is undeniably the most critical consideration.
There may be several indicators for the trend or where the price is headed.
But that is broadly in the realms of assumption.
Only the current price is what holds value and importance.
Remember if you are investing in the market, your primary worry is what the market is doing now.
What the market may do is only secondary consideration.
2. How Much Is Not Too Much
When you are investing on the basis of the trend, there is another key consideration.
You may think you are using the trend to determine when to enter or exit the market.
But most importantly you are deciding how much money you can invest in a specific trend.
That will help in effective money management through the course of your investing graph.
3. Risk Management
Don’t ever think that trend puts you at risk.
Risk is the cardinal concern for all those who are keen on investing.
Remember that more than growing profit, cutting losses is the key to effective investing.
Whether you cut down position during volatile sessions or exit in a downturn are ways to assess risk.
The trend can empower you with knowledge.
Trend Investing Has to Be Systematic
Therefore, the extent of risk you are willing to stomach is solely your prerogative.
That is exactly why rules are so crucial for trend investing.
Rules help maintain order and logic in your overall trading position.
Remember the price and time are crucial constituents of this type of investing.
It makes sense only when these two factors juxtapose in a trend trade.
That again is also dependent on the overall supply-demand matrix.
As a result, trend investing is very closely linked to creating a sense of order and calm in the marketplace.
Far from the maddening crowd, it seeks to create a systematic pattern tracking stock pricing.
The system is what makes the trend trading a sustainable and strategic wonder.
If you want to make money using trend, your pattern of investing has to follow the rules correctly.
That alone will guarantee a long-term profit scenario for the markets.
It will help you in identifying the most important growth triggers.
In many ways, it even helps you in interpreting a trend accurately.
That is again the key factor that will help you in taking advantage of a trend and furthering your investments.
How Can Trend Investing Help?
So the question is how will trend investing help you and why must you incorporate this?
One cardinal factor is that trend investing may be a safe and time-tested way to trade the market
But don’t over leverage yourself from the word go.
Always check the trend with small capital allocation and then increase in tranches.
Don’t look for a trend in every security.
The best approach is to identify just a few counters and analyzing their trend in depth.
Maybe you can choose just 3-5 top performing stocks.
But analyze the trend in depth for each of these counters.
Cover every possible aspect of trading and trend like valuation, timing and price action
That will help you in identifying selected profitable ideas and taking advantage of the trend.
Most importantly trend investing helps you cut out the noise and concentrate on some key stocks/securities.
One of the safest and most profitable approaches to trading is following the trend.
It is true that you may end up making millions of dollars by charting the trend and investing.
But remember you cannot anticipate the trend in the first instance.
You will have to undertake in-depth research for mastering trend investing properly.