There are several different methods of investing in stocks and trading in stocks. One popular tactic is trend trading of stocks. Many people use this kind of stock trading, for example investors who see trends as beneficial sources of profit.
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.
The most significant thing in trend trading is that the price movement should display a momentum in a particular direction. The direction of price movements may be upwards or downwards but it should be consecutive or continuous. Using this method, you expect the price of a stock, which has gone up in the last two days, to continue to go up in the next few days. Similarly, if the price was going downwards, it should continue to go down in its momentum.
Once you have figured out the trending direction of your stock, you should buy it at its prevailing price and hold it for as long as the trend continues in its first direction. Once the trend reverses and the stock moves in the other direction, sell it as soon as you can; do not hold it any longer. If you continue to hold it after it reverses its direction, you may lose not only your gains, but your overall investment as well.
Another important principle in trend trading is to stick to your time frame. For instance, if you have bought a stock that is trending up on a monthly basis, you should only check its monthly performance by tracking monthly closing prices. Any fall in price within a month should be ignored. The price may fluctuate weekly but you should stick to the monthly trend. If you have bought a stock that is trending up over the previous weeks, you should ignore the daily ups and downs and monitor only the weekly closing price.
This is not true that only short-term traders indulge in trend trading. Even for those who have been investing in stocks for a longer time frame of months or years too can apply this method of stock trading to their advantage. It doesn’t matter whether you are investing for short term or long term, it is certainly one of the attractive tools available to you. But, this method requires that you monitor the market on a continual basis to take advantage of it. It is not for those people who invest and forget.