Trading with the Trend
Identifying trends and trading intelligently with them in mind is vital to your success as a trader. Traders are gregarious, and when one or two identify an opportunity or a threat, the others typically follow suit to push the price in the same direction. Once a share has achieved some momentum, it is likely to be sustained for a while. Spotting such a trend will increase your likelihood of making a profit.
Trends indicate where prices will probably head in the future. Trends are not entirely linear. Prices rarely move straight up or straight down. Movements are always a little unpredictable because of the many individuals who are trading, and because traders are largely trading in idiosyncratic ways. Yet there is a herd mentality. When a majority of traders believe the share price is going to move in one direction, they can overpower the minority of traders who disagree with them. When this occurs, the price begins to trend and will usually move in one direction until the majority lose confidence – which is reflected in reduced momentum. At that point, the minority can momentarily exert its influence and push the stock price in the opposite direction. And so on.
There are turning-points in price trends. Trading is very much an activity in which timing is critical. Learning to identify the critical moments as a trader, the moments when a price will soar or plummet to create an opportunity, hinges on the recognition of upward and downward trends.