Investing with the Trend

Trend Investing: Trading on the Market’s Direction

Has market volatility over the years led to less-than-stellar returns for your portfolio?

Trend investing – which is buying and selling stocks based on which way the market appears to be heading – is a strategy that could help you find opportunities in choppy markets.

The market is generally in one of two states – trending either upward or downward, or range-bound, where prices bounce between specific highs and lows. Determining whether the markets are trending in a specific direction or whether they are in a range is important because it will help determine the trading strategy that is most appropriate.

“Trend proponents argue that understanding market movements is an important component of successful trading,” said Brian Bachelier, vice president of active trading at Scottrade. “While this strategy has its share of advocates, it’s important that traders do their own homework to determine if trend investing is the best strategy for their portfolio.”

Proponents of trend investing believe that timing the market by paying attention to trends is a more successful strategy than buying stocks and holding onto them for long periods of time. Many of these proponents point to the market downturn of the early 2000s, as well as the market downturn of 2008 and 2009, to argue that buying and holding stocks is not the best strategy.

Trend investors aren’t building a strategy around buying at a market top or a bottom. Before making a decision, they want to verify that a trend is established.  

Meanwhile, opponents of this strategy believe trading based on trends can be futile.  A trend can disappear by the time you notice it.

Trend vs. Momentum

Although the terms “trend” and “momentum” investing are often used interchangeably, they actually refer to different elements of market movement.

A trend describes a sustained directional movement in the market – an uptrend or downtrend in a specific industry, sector or even across the entire market. Meanwhile, momentum defines the rate of speed for that trend.

What Should You Consider When Trend Investing?

  • Multiple trends appear on every trading chart. These trends range from minor intraday trends to very long-term macro trends that develop over the course of many years.
  • Even within a long-term directional trend, there are countless shorter-term countertrend moves.
  • The emotion of investors can be detected in stock prices. In general, a slow-moving but persistent trend is one that could continue in the same direction for quite a while, but an emotional blow-off move may signal that the trend will soon shift directions. Paying attention to these changes may give you a leg up.

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