Since the 90s, trading of stocks has been made easier with the creation and advent of the online trading system. Nowadays, if you have the internet, you can buy and sell shares. All you need is an online trading account in a reliable online trading brokerage firm like CMC Markets and you can start trading!
Traders use different strategies to make a decision on which shares to buy or sell. In this case, we are focusing on ‘trend trading.’ That is the act of studying an asset’s drive in a specific direction with the intention of gaining. Generally, it is the direction that the price of an asset or the market takes. When the shares are trending upward, the investor enters into an extended position. If the shares are trending downwards, the trader takes a short position. When it comes to trends, there are different lengths; long term, intermediate and short term. Rather than the fundamental value, the tactic depends on short-term movements of the share’s price.
Let’s say the trend is moving up; there will be more risks if the trader takes a position that depends on the trend going in the reverse direction and vice versa. One needs to take into consideration, an asset’s past statistics and data. Traders use what events and market movements from the past to figure out what could happen in the future, therefore making informed decisions. Sometimes, traders will use the term ‘momentum’ when referring to trends. This is the rate of change on the price motions for the asset in mind. The strategy is popular for its reflection of reality. It also applies to yields, interest rates, and equities. Using the trend, investors try to predict the direction of an asset’s price in the future. According to market analysts, the technique enables financiers to trade with charts as the prime factor instead of instincts and fears.
Learning how to study financial charts is a plus skill for any investor. Professional technical analysts also make use of charts to study the market. As long as a share has price data over a specified period of time, a chart can be formed. By graphically representing an asset’s rate movements, charts make it easier for a trader to monitor shares. This way, one can see how past events have affected the market. There are basic chart patterns that every trader should know. These patterns help with identifying market-affecting events.
Gaps are as a result of an asset’s price opening much higher or lower than its closing price for the previous day. Unless the gap is closed, one should conclude that the trend will keep on moving in the gap’s direction.
Head and shoulders
In this pattern, there is an upward and a downward price target. What results if a head and shoulder forms, is an increase within the live uptrend at the time which leads to the creation of the left shoulder after which prices decrease only to bounce back to another high, forming the head. Connecting the lows that came after the head and shoulder were formed, gives the investor a neckline. The pattern is completed and prices go lower once the neckline is compromised.
This pattern is a variant form of the head and shoulders pattern. Whereas the latter pattern offers three points at different prices, the triple bottom/top maintains the same price.
If there are two prices at the same level, it means that shares have made it to a bottom or top. This pattern is more recurrent than the triple top pattern and the head and shoulders which need three points.
These patterns are changing indicators that last long and build the base. They depict a moderate turn from moving downwards, to sideways to an upward trend.
There are many more chart patterns but perfecting one’s skills in the five above would make a positive difference in their trades. Although trend trading as a style of executing trades applies to any keen investor, it highly favours people who only trade part time and beginners who do not have much experience in the industry.
Founder Dinis Guarda
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