Many investors who feel that the trend is their friend and seek to gain from it choose the particular method trend trading in stocks among the large number of ways of investing in stocks or trading in stocks.
The trader should select one stock or a group of several stocks to focus on, just like he would with any other investment strategy. Factors to take into account include market movement and trading volume. After the trader selects a stock, he should analyze its price movements. To qualify as a trending stock, it must be moving in one direction continuously over a set period of time. This depends on the period of time. Short term trend traders can use days or weeks, but for long term trend trading, months or years are better.
When examining price movement in trend trading it is important that it display momentum in a particular direction. The direction need not be only upwards, it can be either up or down as long as it is a continuous trend in one direction. The expectation is that the price of a stock, which has trended upward for a few days, will continue to go up over the next few days. While if the trend is downward, the momentum should continue downward.
After the trend in a particular stock is identified, you can purchase the stock at the current price and hold it for the duration of the trend. When the upward or downward trend reverses direction, the stock should be sold without much delay. You should not continue to keep the stock even after the reversal there is a risk of not realizing the notional profits, not to mention the chances of actually incurring losses.
The time frame is also an important principle in trend trading, and one must stick to it. Therefore if you are buying a stock on the basis of a monthly trend, you must track its performance based on monthly closing prices, so any time a fall in price is registered within a month it should be ignored. So if the price fluctuates weekly, you need to ignore it and stick to the monthly trend. Similarly if you are buying a stock on a weekly trend, you should be ignoring daily ups and downs in price and looking only at weekly price.It is a myth that only short-term traders indulge in trend trading. Those investing in stocks for a longer time frame of months or years too can apply this method of stock trading to their advantage. Whether you are investing for short term or long term, it is certainly one of the attractive choices available to you. However, this method requires that you monitor the market on a continual basis to take advantage of it. It is not for persons who buy a stock and forget about it because they are too busy with their career or other preoccupations.
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