"The trend is your friend" is a stock market rule. Trend followers take it to heart. A strategy with opportunities, but also with risks.
Investment strategies in comparison (Part III): Trend following - profiting from herd instinct
"The trend is your friend." If you want to take this stock market rule to heart, choose trend following as your strategy. It offers good chances of profit. After all, a stock's profit prospects depend largely on how its price develops. And that in turn depends on demand. If many investors buy a share, its price rises. If many investors sell a stock, it falls. Trend following gives you the opportunity to specifically follow the herd instinct and profit from it. Read on to find out what this strategy is all about and what opportunities and risks it entails.
Most important basic rule: Do what the market does
Trend followers rely on the mood that is currently prevailing in the market. For them, rising prices are a sign that a stock is in strong demand and that demand will continue in the future. Consequently, they buy the stock in the hope that prices will rise. Simply put, the basic rule of trend following is to jump on the bandwagon. As a trend follower, however, you can also profit from falling prices, provided you are classified as a "term trader" by your bank. Then, for example, you can buy put options or leverage certificates that go up when the price is in a downtrend.
How to identify stock market trends
How can you determine the upward or downward trend in https://exness-ar.com/tnzyl-exness/ that a security or index is currently experiencing? To do this, you analyze the chart (i.e. the price trend) very closely. The following tools are crucial for trend followers:
You can see from the chart whether the price of a security is generally going up or down. For this reason, trend following is one of the strategies in the field of chart analysis. In the chart of a stock or an index, you can often draw a so-called trend channel. These are two lines, which limit the upper and the lower swings of the chart. If the trend channel points upwards, an upward trend is clearly identified. If it points downwards, you are dealing with a downward trend.
However, you have to pay attention when the current security price breaks through the trend channel. If it falls below the lower line of an upward trend, this means that this upward trend no longer exists. Then the trend following strategy recommends to sell the stock as soon as possible. Conversely, an upward breakout in a downward trend is a sign that said downward trend is no longer intact. According to the trend-following strategy, you must dispose of put options or other securities with which you have bet on a further falling price.