Techniques for Identifying Market Trends
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If you want to make money by timing the stock market you need to follow the trends.
Buying and selling creates its own momentum and a market that’s moving up or down is likely to keep moving in that direction for a certain period of time.
What this means is that you should avoid trading against the current trend.
For example, when the market is bearish and heading down, don’t try to predict which stocks have hit bottom, that would be like trying to catch a falling knife.
Instead, find an objective way to both identify the current trend and decipher when that trend has changed too, because just like the saying goes, “the trend is your friend, except at the end”.
So, let’s explore two simple techniques for identifying market trends.
The most common ways to look at the nature of a trend’s movement. As a stock moves up or down, it rarely does so in a straight line, rather it zigzags forming a series of highs and lows.
If the highs keep getting higher and the lows keep getting higher that stock is in an uptrend. If the highs get lower and the lows get lower, you’re looking at a downtrend. And if the highs and lows are consistent over a certain period, it’s in a sideways trend.
Another way to identify the market trend is to look beyond the daily price fluctuations and determine the general direction of a stock.
You do this by calculating an average. For example, a 20-day simple moving average or an SMA, is an average of the past 20 days of closing prices, which moves or updates on a daily basis by incorporating the latest prices.
If the SMA is sloping upwards, that’s an uptrend; sloping down downtrend and sideways, means flat.
A 20-day SMA gives a good picture of the short-term trend but you can also use other periods like the 50-day SMA and the 200-day SMA for the long-term trend. Those aren’t the only moving averages, however, there’s the exponential moving average or EMA, and the weighted moving average or WMA, which gives more weight to recent prices.
As a trader, you can use any of these techniques individually, but for the most accurate picture of market trends, you should use them all.
Because when it comes to behavioral analysis, the best way to increase your chances of success, is to consider as much data as possible.
So that’s market timing! Next, let’s cover support and resistance zones.
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