Paper-Trader Stock Market Simulator
How important is the "trend" in stock market investing?
We've heard the saying "The trend is your friend" but how important is it and how do you use the trend to judge your entry and exits of trades.
Well like most things in the stock market you can make this as complicated as you like, but there are some simple fundamentals that you can use to help in your investment decisions.
Firstly though, you need to have decided what style of investing you are doing. Is it short term trading, or perhaps medium term strategies like Renting Shares, or is your thinking longer term. This will influence how you treat the trend.
Let's assume that we're interested in a trade that'll run for a least a few weeks, such as Renting Shares or Selling Insurance. It is important that we pick the right time to enter this trade so that our risk is reduced and our profit potential is greatest.
Note: This information provided here is not intended to be any type of financial advice; it is for educational purposes only.
If we look at the chart below we can immediately see a trend. This is a 3 month chart showing daily candles.
Now there are couple of principles to follow when using trends. Firstly, never trade against the trend. This 3 month chart is showing an uptrend, so for our medium term strategy we would never go short (sell to open). We are looking for BUYING opportunities in a uptrend.
Secondly, when looking at the point to enter the trade we should not be too far away from the trend. Generally, your risk lowers the closer you buy to the trendline.
Thirdly, don't view a single trend line and don't take a micro view to the trend. To illustrate what I mean here, take a look at the following chart. This chart shows 18 months of weekly candles. What's interesting is that this is the same stock as above and at the same time; just a longer term view.
Look how far the current price is away from the 18 month trend. Stocks tend to return to their longer term trend and if you bought at this time you could be at risk of loss. Of course nothing is guaranteed here and it's possible that this stock may continue on it's short term trend for some time.
But the point is how to reduce our risk, and buying close to both the long and short term trend lines is one way of achieving this.
The old saying "The trend is your friend" is sometimes easily forgotten when the emotions of the market take hold, but savvy investors never lose sight of it.