Investing Trends

Understanding Trend Trading

Successful traders likely have been familiar with the importance of trends in trading since a group of merchants gathered under a buttonwood tree in New York to trade stocks. Trend trading not only represents the potential for a big move and profit, but also the path of least resistance for price as an established trend is likely to continue.

Newton’s First Law of Physics states, “An object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” This is the compelling basis for trading trends as they are likely to continue unless acted upon by an outside force (such as disappointing earnings, a market panic, geopolitical events, etc.), and it’s the reason why some trends stay in place for years.

The ability to identify trends and trade them effectively is fundamental to trading success. While there are other methods that have been successful, like fundamental analysis, they can be subjective, whereas trend following has stood the test of time.

Trend trading challenges

If trading trends is the cornerstone to successful speculation and big returns, then you have to wonder at some point, why aren’t most traders good at it?

Capturing trends is difficult. Inexperienced traders often do not have the capital to trade trends, and professional traders are adept at running critical price points to make quick profits on the accounts of non-professional traders.

The problem with trading trends is threefold:

  • First, trend trading can be difficult to exploit for profit with some trading approaches. Breakout methods, for example, can lead to explosive gains but also suffer a series of false starts where an entry is signalled but then rejected by the market. This causes a series of stop losses to be hit that can be a demoralizing experience, not only because the trader loses money but because it drains self-confidence.
  • Second, most traders do not have enough capital to trade trends over the long term.
  • Finally, most floor traders on the stock and commodity exchanges are familiar with these types of trend-following methods. If a stock is making a new 20-day price high, then the floor traders are aware of it also. Floor traders run through these trend follower’s price entry stops where they then cover their positions, take profits, and quickly take long positions as they ride the market back up as it resumes its upward trend, making money both ways.

Can you begin to understand how difficult it can be to trade trends and why so many traders struggle with it?

BTW, in case you need to follow and understand trends, you should try Stockal (when we release it, of course). Just drop your email address here, we promise to give you one full free year of all the purchase features.

Thoughts@Stockal
At Stockal, we love to watch how markets respond to unique events and how our users (investors - you and old) can make the best use of circumstances to make smart investments. In Thoughts@Stockal, we do deep and broad analysis of such impactful trends and events.

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