Follow the Trend
Always monitor trends, observing trends may alert you to the opportunities you wouldn’t find it normally. Prices move in trend of any market of the world and any type of market whether commodity markets, currency market or share markets. When the wind changes it’s direction from bullish to bearish or -bearish to bullish, you immediately understand that through the trend-line change.
Our first question will be how to determine the trend? Little practice for the charts will make you comfortable with trend-line. Preferably, trend-line should be a line sloping upward or downward at 45 degree angle. I have illustration for that showing 45º line and of bullish market moves.
45 degree Trend-line with Over bought (OB) and Over Sold (OS) points
Bullish trend moves market higher than the previous high and make the lower bottom than previous bottom. Actually, you can use this bottoms to buy stocks and tops to sell stocks.
While the market is up-trending, it is not advisable to short sell on top of the waves at overbought level, because we never know how much prices will move up. But, you can definitely use the bottoms to buy more stocks.
You have to check out the individual stock that belongs to your portfolio or you want to add that stocks in your portfolio. And also monitor the trending direction with market (Index) and sectors (Industries) of your portfolio.
You can get a good idea of where the market is headed with just two pieces of information, First is, Price and second is volume. You get a picture that tells whether there are more sellers in the market or buyers. In fact, large numbers of people determine the new trend of the market and so the volume and price gets new high.
Trend-line of S&P Nifty-50 of NSE
In above chart, there are two red trend-line that are at 45° line. One of down trend line suggest the end of bearish market and another supports the bullish market trend till Nifty reached 5250. The more four trend-line are black, out of two of them suggest bullish at lower side of chart and another two make the “Flag Pattern” making new highs and lower bottoms. For the continuation of trend-line, we have to wait till the price break the either upper side or lower side of trend-line (“Flag Pattern”).
More objectives to consider :
Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.
Cut losses is the rule. If you lose the maximum of 15% of your trade, you should quit. This means that during periods of higher volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear.
Trend following should be in systematic matter. Price and time are pivotal at all times. This technique is not based on an analysis of fundamental supply or demand factors.
Trend Following answers the questions:
How and when to enter the market.
How many contracts and shares to trade at any time.
How much money to risk on each trade.
How to exit the trade if it becomes unprofitable.
How to exit the trade if it becomes profitable..
If you really digest the above rule “Follow the trend” you, in fact understand the many more rules for the stock market by merely understanding one rule.
- Don’t average down to feet better.
- Trade what you see, not what you want to see.
- When the ship starts to sink, don’t pray – jump.
- Personal views on the economy should not influence my trading decisions.
- I learned not to take other’s opinion and view but, to trade my own view.
- Never buy a stock, Only to obtain dividend.
- Never permit speculative trade to turn into investments.
- A hold is as good as buy.
- Never add to a losing position.
And many more……
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Learning lessons from the Stock Market…….
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This is a very well written article. It actually reminds me of what I started learning in my stats class about trend lines. Anyway, very informative as always. PS: You’d probably get more comments if you made your “2 comments” or whatever thing on your main page clickable. Just a friendly webdesigning tip!
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Helpful blog, bookmarked the website with hopes to read more!