Spark Global Limited Reports:
Trend trading, in its simplest form, is the act of buying assets that are going up and selling assets that are going down.
It also comes in many forms.
Some take the long view, buying the best-performing futures contracts and trying to hold them for years, only making about 25 per cent of their trade gains (but the winners are much bigger than the losers). Others buy momentum stocks at the opening and hold them for 10 minutes.
While the average daily trades of these traders look very different, they are all exploiting the same phenomenon: trends.
What is a trend?
A trend, in its simplest form, is a series of higher highs and lower highs.
If you’ve ever seen a few stock charts in your life, you know that stocks don’t move in a straight line. While the overall trend may be up, it oscillates up and down on the way up.
This is the key to keep in mind. Let’s take a look at some charts of stocks with strong trends to illustrate the point.
Here’s a chart of Wells Fargo, a big bank you’re probably familiar with. The stock has been one of the best performers in the financial sector this year and has a clear upward trend.
But it didn’t go straight up. It is zigzagging, with occasional dips where some traders and investors might think the trend is over.
How to judge stock trends?
In this article, we are talking about the price trend of stock prices, not the trend of people preferring a company, or the trend of a company’s profits.
The main way traders identify stock trends is through chart analysis, known as “technical analysis.”
Technical analysis simply uses market-generated information, such as stock prices and volume, to make trading decisions. Many traders also use “technical indicators”, which are basically arithmetic formulas applied to price and volume data.
There are thousands of methods traders use to determine market trends, but they all focus on the same concept: find something that is going up and has a greater than 50% chance of going up again.