Why the trend really is a trader's friend

by , 25 May 2015

You've most likely heard the stock market adage ‘the trend is your friend'.

As a trader, you might want to try to ignore a trend by attempting to time a turning point in the market.

But to improve your chances of trading success, you should trade with the trend.

Here's why…


The ins and outs of a trend


A trend describes the general direction in which a financial instrument moves. A financial instrument includes shares, commodities, currencies, bonds and indices.

When it comes to trading, there are three types of trends:

  • An uptrend or upward trend;
  • A downtrend or downward trend; and
  • A sideways trend or consolidation trend.


Trading with the trend


If prices of the financial instrument you trade are rising, in other words an upward trend is in place, it’s not advisable to trade against it. Remember, the trend is your friend. And this means you should buy (go long) when market prices are on the up.

If prices of the financial instrument you trade are falling, in other words a downward trend is in place, it’s also not advisable to trade against it. This means you should sell (go short) when market prices are falling.


Trying to call the end of a trend


Unfortunately this is a mistake many traders make: Trying to call the end of a current trend.

It’s almost impossible to do. And if you manage it, it’s most likely down to luck than your analysis.

Trying to time and call market bottoms and tops, when the trend is about to change, is best left alone. No doubt you’ll end up losing money.

You give yourself the best chance of making money by trading with the trend. Buy when the price of a financial instrument is rising and sell when the price of a financial instrument is falling.

So there you have it. Why the trend really is a trader’s friend.

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