Thursday, March 20, 2008

Trading with the trend

“The trend is your friend,” This is the famous line that stock market guru’s will tell their students. Anyone who has ever gone to a technical analysis seminar has heard it. But few people actually know what they mean? Basically it means you want to trade with the trend and not against it. Don’t try to find the time were the top or bottom of a stock is.

As opposed to top picking, which is normally a bad idea, a trader should look at stocks that keep going up like and assume that they will probably keep going up. No one knows when an up trending stock will go down until it already has. For example if a stock goes from $60 to $140 1 year, then to $190 the next we should assume that it will go even higher the next year. Provided it is still trending up.

So, how can you tell if a stock is in an uptrend? Well if the stock is making higher highs and higher low, so that the overall movement is up, that is considered an uptrend. We would assume that this stock is going to keep going up.

On the other side when we are in a down trend is when a stock is making lower lows and lower highs so that the overall trend is downward. In this case we should assume that this stock will continue going down.

Trend traders will buy a stock when they make a higher low and ride it up until it is not in an uptrend anymore.

When a stock, that was previously making higher highs and higher lows, makes a lower high and a lower low it is said to be in a down trend. It is time to get out of this stock. Trading with the trend is possibly the most important part of technical analysis. To make money in the markets you should not be bullish on a stock that is in a downtrend, or bearish on a stock that is in an uptrend.

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