Trend trading demands that you follow the market closely, and know your own tendencies.
When taking on the stock market, you have several different trading strategies to choose from. One of the most popular is trend trading, in which you follow a stock's dominant moves -- either up or down -- and simply join the crowd. Trend trading takes planning and timing, but once you master this technique you'll have a fairly easy time of choosing your trades.
Instructions
1. Learn trade online by using a practice account. Most online brokerage services allow you to trade with virtual funds for a limited period of time. You need to provide minimal information, and will be given a password to access your account. Set aside at least an hour a day to study the market, learn the online trading system, and learn buy and sell stocks.
2. Study the price charts of stocks that interest you, so that you grow familiar with these simple graphs showing price on the vertical axis and time on the horizontal. Charts indicate the closing price of the stock over a specific increment of time: weekly, daily, hourly or shorter increments. At the bottom is a small bar graph showing the volume (number of shares traded) over that time period. Candlestick charts show the high and low, and also the range of prices at which the stock traded -- black and white candles show whether the price closed lower or higher, respectively. Charts can also show a pair of moving averages, simple lines that smooth out the daily fluctuations to show the average close over the past 20 and 50 days (or some other combination). The moving averages show the general direction of the trend, if one is present. The longer the time increment covered by the moving average, the more durable any trend you will see.
3. Identify the trend by the indicators on the chart, including price, volume and moving averages. Watch the price ranges and the highs and lows: a series of steadily rising lows indicates the stock may be trending up; a series of descending highs hints at a downward trend. Then study the moving averages to see if they are moving in the general direction as the price indicators. A trend is strengthened by increasing volume (the number of shares traded). Low volume negates the trend. Remember that most stocks don't trend -- instead, they just move sideways, remaining fairly stable around a consensus market value. Determine if the trend is caused by weakness or strength in a particular business sector, a dominant trend in the stock market or by news on the particular company you are studying.
4. Watch for a pullback in the trend. If a stock has been rising over the last month, and then experiences a fall in price, you've found a pullback or retracement move. This could be caused by profit-taking by successful investors. It could also mean a reversal of the trend on the basis of sector weakness, a market correction or the company's own financial results.
5. If the trend resumes after the pullback, trade with it. This could be indicated by a stock coming off its previous lows with a series of higher closes. If you have two moving averages indicated, a short-term moving average crossing over a longer-term moving average may also signal a trend. Buy a rising trend, sell a falling trend. Keep a close eye on the price movement, and put in a stop-loss order to prevent any damage from a sudden move against your position. As the stock continues to move in your direction, move the stop-loss with it to lock in your profits. As long as the trend continues, stay invested. Don't close your position until the trend flattens out, the moving averages cross once again or heavy volume supports a counter-trend. Keep watching for trending stocks, and try to develop your own system of finding trends with a combination of useful chart signals.
Tags: moving averages, moving average, general direction, number shares, number shares traded
