To trade successfully, you must trade with the trend. Trends tend to persist for long periods of time and it is possible to make large amounts of money catching those trends.
In life, trends are all around us and you only have to look at the weather to know that's true. It's a pretty safe bet that temperatures will be colder in December than they will be in August, at least in the Northern Hemisphere. Trends also persist in the marketplace, but unlike the weather, these are moving trends and change year to year. As a trader and investor, you want catch the trends near a top or bottom.
The reality is you're not going to sell at the top and buy at the bottom of the market. Most traders never accomplish that, and nor should you try, as the odds of picking tops and bottoms is a losing game. You want to catch the fat 70% of the middle of the move. This strategy can really make a huge difference to your bottom line.
The Trend Is Your Friend
You may have heard the expression, "The trend is your friend." This is one truism you can trust. Since trends can persist for long periods, a position taken with the trend will more likely be successful than one taken randomly or against the trend. Trading with the trend in a bull market means buying on dips and in a bear market, selling on rallies.
One of the best ways to spot trends is to look at charts. Visually you can see right away if a market is headed higher or lower. You could show a chart to a child and ask them if the lines are going up or down. They could quickly tell you what they think as they don't over think the markets like many traders do. There are many tools and analysis available to help a trader determine where the trend is headed. Various technical analysis, moving averages, or tools like MarketClub's Trade Triangle technology are some examples.
Uptrends, Downtrends and Sideways
Minor uptrends or downtrends within a larger trend can confuse the beginner. It may appear that the market has turned around and made a reversal. However, the seasoned technical trader will see that these minor trends are small ripples against the major, longer term trend. Remember, if the trend line, or moving averages, or Trade Triangles are not violated, then the bigger trend most likely remains intact and will resume its direction.
Very seldom do markets go directly from uptrend to downtrend. At the end of a prolonged move, traders become less aggressive and prices may swing in a sideways or consolidation pattern.
Many times, markets break into an uptrend or downtrend out of a sideways trading pattern or consolidation. As a general rule, the longer the consolidation, the greater the move after the breakout.
Because traders need time to be convinced that they should put their hard-earned money into the market, sideways patterns are more likely to occur near the bottom of a move. Contrary to that, the beginning of a downtrend often will be sharp and sudden as investors pull their money out of the market.
One of the most important keys in my mind is using the longer term charts to determine long-term trends. I always start by looking for trends with the monthly charts, then I move onto the weekly charts, and finally the daily charts that show shorter term trends. Over the years, I have found that this approach works well as it keeps me out of what I call "mindless markets," which are headed nowhere and tie up your capital.
Technical analysis is more of an art than a science. To date there is no program or system that is 100% correct, which is why money management and stops are so important to protect your capital. One trader I know describes his trading capital as soldiers in battalions. He says, "they can fight a lot of battles, win some and lose some, but in the end the important point is to win the war."
As a trader, your goal is to "win the war" and make money. Those traders who trade with the trend will win their own wars and accomplish their financial goals.
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