Trend following: The key to trading

One common way that individuals and institutions trade in markets is through tracking and acting on trends. Trend analysis and trend following can help a company to identify market opportunities and know opportune times to enter and exit positions, often riding on the coat tails of a trend and exiting before that trend reverses. While it can be difficult to identify trends early enough in order to benefit from them, as well as knowing when to exit the trend, it can be an effective and lucrative way to trade.

Spotting Trends

One of the most challenging things to do when following a trend is knowing when and how to spot them. Stocks will move up and down routinely throughout the day when a stock is trading and can quickly reverse. To start with you should understand your trading horizon. While trading on a trend of a stock will not be a long-term process, trading in terms of minutes or days is a different thing when trading and requires different strategies.

Intra-Day Trend Trading

If you are looking to trade for a few minutes to capture a smaller movement in stock then you will need to understand how t quickly identify these opportunities and capitalize on them. Often, computer programs are used to quickly identify a trend based on criteria that is predefined, either based on pre-programmed or custom designed guidelines that you identify. For example, if a stock increases two percent quickly on a certain volume, you may have a trigger to buy the stock and hold until it increases another percent. Doing so can let you take advantage of a nice market move. This is the strategy that is used by many high frequency trading outfits and allows for impressive returns if you can quickly locate and execute on trades.

Multiple Day Trading on Trends

Some trend trading is designed to take advantage of longer periods of time. These trades are less based on speed of execution and are more based on locating good pricing opportunities. For this protracted trend trading, the emphasis is on using tools that spot trends often through the use of regression analysis which will pick up the manner in which a stock is trending based on historical performance through a regression curve and identify that this is the most likely future path of the stock. If the stocks current price is slightly away from this trend than a trader may decide to chart it back to this trend. Capitalizing on these longer term trends may not be as instantly gratifying as a short trend trade, but may provide for larger movements and less risk overall for the trader.

Benefits of Trend or Momentum Trading

Trend or momentum trading can provide some significant benefits for traders. Traders can quickly capture returns and minimize the risk as they are not a long term holder of a stock position. In addition, they can often keep themselves from getting wedded to a specific stock or ideology only to it quickly change on them. Trend or momentum traders will use a system and industry for a short-term period and quickly shift gear as new opportunities arise which can help to prevent them from falling victim to the fates of an industry.

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