Trend Trading – Using Momentum to Your Advantage

Learning how to make successful trades on the stock market without the assistance of a course in stock market trading or a trained broker can be quite a challenge, especially if your time for research and training is somewhat limited. Inexperienced investors might often feel overwhelmed by terminology and strategies like trend trading, fundamental or technical analysis, which are often used and mentioned by investment experts. Although these concepts might seem complex, the principles on which they are based are actually quite simple. In order to develop your understanding, it’s important to grasp the basic assumptions of each style of trading.

In order to fully understand trend trading, you must first appreciate the basic assumptions on which technical analysis is based. First, technical analysts believe that market price accounts for everything, eliminating the need to spend as much time on research and evaluation as fundamental analysts do. Second, technical analysts assume that price moves in trends, meaning that once a trend is established, it’s likely to continue along its current path unless something moves to interrupt it. Third, and most importantly, technical analysts believe that history tends to repeat itself. Trend trading is an elaboration on the last two assumptions that works by using market price to make more informed trading decisions.

If you were to ask a stock expert to define trend trading, they would tell you that it is a strategy for investing that makes the process more secure by analyzing an asset’s current market momentum before moving into a position to buy or sell. Those that are interesting in adding this type of strategy to their toolbox should understand the importance of entering into a long position as soon as a security demonstrates an upward trend. Remember that positive trends manifest themselves as successively higher closing prices. On the other hand, trend traders should always assume a short position when the stock manifests a negative trend through successively lower closing prices. Close attention to trends and patterns eventually allow traders to make decisions about what the stock is likely to do before it moves on the charts.

Trend trading strategies are founded in the assumption that the current price movement of a security will continue indefinitely unless something moves to interrupt it, like political pressure or a change in public opinion. Traders of all investment styles can use this strategy, regardless of whether they prefer short-term, intermediate and long-term trades. Time frame is irrelevant as long as a trend trader remembers that it is always smart to remain in a position until they are convinced that the trend is going to change.

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