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Identifying The Trend Is Key To Success In The Markets

Anyone who invests in the markets needs to be able to identify the current trend in many time frames. If you are a trader, you might identify the trend in a short-term intraday chart. If you are an investor, you might use a daily and weekly chart. Ignoring the current trend will lead to losses. This is especially important for those trades where a substantial gain has happened. Stick around too long and the gain vanishes.

The reason the trend is so important is that identifies what the crowd is doing. The only reason anyone owns a stock is for capital gains and income from dividends. No one invests money in the markets expecting to lose. If this was the case why even invest in the first place – you could just set your cash on fire and accomplish the same thing. The trend is derived from both regular and institutional investors choosing to buy and sell stocks on a daily basis. While the largest funds can actually create a trend by their actions, regular investors and traders cannot. It is for this reason that the trend is so important.

The key to finding the trend is to use multiple time frames in your search. It is not enough to just look at one – they all interact together. The longer the time frame the stronger the trend is in general. An up-trend on a weekly chart is far more powerful than an up-trend on an hourly chart. Remember, an hourly chart can easily show what appears to be a strong up-trend while the daily or weekly chart is in a strong down trend. The longer term trend always wins out. The hourly up-trend is just a bounce in an otherwise declining price. If you buy into this type of up-trend you need to realize that it will be a shorter term trade versus an investment.

The length of the trend also correlates with your expected holding time. The shorter the time frame the shorter the hold. An up-trend on a 5 minute chart might only last 2 hours. An up-trend on an hourly chart might last a few days. An up-trend on a daily chart a few weeks. If you are playing the trend you have to understand that all trends have an expiration – they run their course and then are usually done. You do not make a long-term investment decision based upon a 5 minute chart trend. The important thing is to pay attention to what is going on in the markets to maximize your returns and minimize losses.

 

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