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 dot.com-fueled 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.

Read Next: Understanding the Psychology of Stock Traders

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The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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