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Wednesday, December 30, 2009

How To Use Trend Following As A Market Strategy

By Chris Cole

The technique of trend following goes against the old Wall St. Philosophy of buy low and sell high. It takes advantage of the market whether the current trend is up or down. Traders using the trend following method begin trading after a trend is already established. Other traders try and envision what the market will do, trend followers wait for the market to do it. The dimensions of the trading account and the volatility of the issue are the primary determining factors in how much to invest.

Most trend followers invest in sophisticated software that can be programmed to exit if the trend changes all of a sudden. Then the traders keep waiting and see if the trend reasserts itself before reinvesting. This is about following the already established pattern of certain stocks.

The most important indicator for a trend supporter is cost. He may take other things into account, but price is the ruling factor. The timing of the trade is the second vital factor, even though it is less significant than the amount of the trade. Before the trader buys, he's got an exit strategy ready knowing when he will sell whether the trade is profitable or not. The software allows for a stop loss to be set when the loss reaches the maximum acceptable amount.

Before entering a trade, most trend disciples will test it on their software so they can evaluate the likely risks and gains. The software is programmed with various factors in relation to the particular trade. The trader then decides if he should make the trade under consideration.

Trends are effected by events that can't be foreseen. An issue in a upward trend can go down due to an event or can go up. Hurricane Katrina is an example of an event. As shortly it it became clear the hurricane would hit the city of New Orleans, petrol costs rose. Trend disciples in the commodities and stock exchanges began investing heavily in oil which drove prices up further. there was some feedback of trend following, particularly in the commodities market. Some critics believe that trend disciples essentially effect the market.

All stock exchange investments are of a speculative nature. The strategy of following trends is one of many employed by stockholders. It allows stockholders to take advantage of downward trends as well as up swings and make a profit in any kind of market. Trend followers hold stocks for more time than those who use hot stack strategies in which the buy and sell might be concluded in a matter of hours. They also exploit complicated software which can assist them in making there choices.

In the stock exchange there's no warranted strategy for earning profits. It's a necessity to have a plan or you will certainly lose money. Trend following should by one of several techniques you employ to maximise your gains and minimize your losses. - 23208

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