Although everybody is behind trends and invests lot of money in IT-systems to identify them, most traders fail in the end.
How come that happens? Investors often forget the basic principles and tools in identify trading trends.
Having said that, it is not easy!
If it would be easy to identify a trend and more luckily to invest at the beginning of a new evolving trend more people would end up making a fortune in no time. However, it really depends what kind of trend you are catching.
The Internet and Technology Trend between 1995 and 2000 was an extraordinary intensive and long trend to play. Lots of people made a fortune in that time to also ended losing everything in the years followed. Especially those that were too greedy and held on to the gains hoping the trend would continue.
How to identify changing trends?
The more smart people (let’s call it the not greedy ones) were able to keep their fortunes now started playing the downward trading trend in the year 2000-2002.
But let us come to the question, how we can identify trading trends?
There are, as usual, several ways how an individual can identify a trend evolving. But let’s first have a look on the different phases of an upward trend.
- A trend normally starts very small and no one really recognizes that something big is evolving
- A few smart people start investing as they can think of the huge opportunities possible when investing in a particular technology or market
- As more and more people start joining the club, the trend is becoming more robust but still too
- Volatility is normally high as uncertainty about the future development of the trend is high
- The trend continuous and more people jump on the train. The trend may already have started to get attention in the news
- Press articles and trend magazines have started writing articles about that particular topic and now the mass starts getting attention
- If the topic is hot then the fire starts spreading fast. People may recognize in retrospect that the past trend is intact and jump on the boat immediately. That’s positive for the trend as there are normally more buyers than sellers.
- More and more magazines and newspaper write about the topic. Bulletin Boards are full of information and people can feel the impact of the new (e.g. in the case of the Internet) technology.
- If a trading trend is really strong, we will start seeing euphoria. Volatility is starting increasing dramatically but the trend is intact. That’s by the way the point where the smart investor gets
- Every upward trend has an end. This trend is normally accompanied with tremendous volatility.
On the one side we have the ones who get afraid and jump out at any price – so there is downward pressure. On the other side we have the others who see this downward pressure as a buying opportunity and jump in – hence volatility.
Suddenly the trend is coming to an abrupt end! If you are still invested and I bet you normally are then the fire is on! What we normally see is intense selling pressure in the first days and week.
After a nice correction the last bulls enter again. That’s a normal phenomenon as the “greedy” bulls regard the entry levels suddenly as attractive again. Unfortunately that’s the big mistake. Believe it or not, in most cases we have seen the start of a downward trend and this may go faster as you like.
How to identify trading trends?
A downward trend or correction normally goes much quicker as an upward trend. However the party on the upside normally takes much longer.
But back to our question, how can we identify trading trends?
Or maybe how can we learn from the past.
First advice: Study charts. It sounds so simple and easy and in fact it is. Studying past trends is in my view a valuable source in learning how to avoid mistakes in the future. Of course not every trend is exactly as the one I just described above.
But trends are very closely related to investment behavior or the science called “behavioral finance”. “Greed” and “Fear” are very closely related in the world of trading. So my advice: Go to the Internet and download past charts of trends for stocks that interest you.
Look at the NASDAQ chart, look at the charts of some Chinese Internet stocks, and identify the early trend in the Nanotechnology area. Look at the Gold chart. Go back and study the chart of the SPY ETF and so on.
Second advice: Start thinking about your own behavior. Do you act like all the others? Or have you implemented your own style. If you act like the mass you will be no different than all the others and will make the same mistakes.
Third advice: Think first – act afterwards. Before investing any money take your time in thinking about the evolving trend. Do you see any future potential? Does it make sense?
Be creative and think about future business opportunities. If can identify them, think about why the trend is evolving. There are good reasons. Start researching the reasons. Use your own good feeling. Try to bring together as much analysis you can. Remember, it’s your money you invest and you will agree with me not to loose anything any time soon.
There are many books in the market where you can buy concerning possible future trading trends. Why not buying one of them?
These guys are paid for doing nothing other than thinking about possible future trends. I got some great ideas and maybe one or two of them may be a success. Just go to Amazon and type in future trends. You will be amazed how many books and product will appear.
The most difficult thing concerning trends is to find out when to enter and when to exit. In other words the correct timing of a trend is often giving a headache. To be honest, there is no real solution to solve this problem. And not even a good trading system will help you with this.
If there would be one, all the problems concerning timing would have been solved and I didn’t have to write this article.
However, there are possibilities to limit your risks in investing.
Although everyone agrees to use stop loss and stop limits when trading stocks, options or futures, lot’s of traders don’t do it! Don’t ask me why, but it’s a fact. In using a stop loss you clearly limit your loss potential. So if the trend continuous to go up, you simply adjusts your stop loss limit upwards. Believe you will sleep better in bumpy markets.
That said, I hope that this short article was helpful to think a bit more how to follow trends. Don’t rush in when any others do. Think first – act afterwards. You may avoid losses and that’s all what counts. Look for possible future trends and be open-minded.
Success will come and you may end up as a winner.