What Is Trend Trading?

Before you buy a stock, it is practically essential to conduct research on the stock’s past trading prices and most recent trading trends. In addition to the other telling factors that investors research before making a purchase, these “trends” are commonly seen as a very positive indication of how a stock might perform in the near future. In fact, some investors have turned this kind of research into a primary factor of their personal trading strategies.

Calling this method, “trend trading,” these investors intend to profit off of their trades by analyzing the security’s momentum over time. Basically, if the stock appears to be moving “on a trend” – or consistently heading in the same direction over time, that is – trend traders will buy into the security. Thus, this style of trading depends on the assumption that the stock will continue to move along its current trend into the future.

Then, if a stock seemingly reverses in its trend – or starts moving downward in price, in most cases – investors will try to get out almost immediately. They might do this by implementing a stop-loss provision, which is an instruction investors can make in the process of purchasing a stock. This provision will tell their portfolios to automatically sell off shares of the stock if the stock’s price sinks down below a certain value. Effectively, stop-loss provisions can help investors to mitigate any losses that they might incur if their stock does not continue on its perceived trend. The ability to mitigate loss makes trend trading a particularly appealing strategy to many investors.

You might be wondering, though – can trend trading strategies be used for long-term investing? This is a good question because typically in the markets, price trends do not last for extremely long periods of time. However, the answer to this question is fairly complicated and depends on the nature of the trend that an investor is looking at. What this means is that some investors may use “trend trading” to look at trends other than just the stock’s price. For example, some investors might study a stock’s moving average. Moving averages are averages of the stock’s prices over a particular period of time. More specifically, these terms average the closing prices of a stock over either a short-term or a long-term period. For example, if a stock’s short-term moving average is $25, that might mean that the average of its closing prices for the past 10 days was $25. Then, if its long-term moving average is $20, we might know that the stock has performed “less well” in the past 200 days combined, but that its price has recently begun to improve in the past 10 days. This could be seen as the start of a trend.

Now, taking this analysis back to the idea of trend trading, it can be simple to see how metrics such as moving averages can help investors to consider the prices of different stocks in more calculated ways. Instead of saying, “the price was $20 yesterday and is $21 today, this might be a trend,” investors can test their potential purchases over longer periods of time and for more specific trends. By looking at longer-term trends, then, investors might be able to use trend trading strategies to profit in the long-term.

Of course, when looking at any strategy, it is always important to consider other risk factors and market indicators. That said, reading up further on investing strategies that you have not yet heard of might help you to find new strategies that are better for you!