Find Stock Market Trends – EASY! Investors who decide for very safe forms of investments, such as call money accounts or fixed deposit accounts, don’t necessarily need to have any knowledge about these investment types. When setting up a fixed account, the investor chooses the desired amount that is then deposited on an account and is rewarded with interest by the bank.
Next to investment accounts, there are several other investment types requiring more knowledge from the investor. Examples are traded securities, such as bonds and stocks, but more importantly, structured financial products that are commonly referred to as derivatives like binary options. Who wants to invest in products traded on financial markets or in derivatives with a particular base value, whose developments are characterized by changes in prices or rates, always has to decide when to buy or sell the financial product. An important term in this context is ‘trend’.
Characteristics of stock market trends
Most customers are probably familiar with the term ‘trend’ outside of financial matters. Independently from the stock exchange, a trend describes the development of something in a particular direction. If for example, customers have preferably bought black cars for a while, this is referred to as a trend for black cars. In general, trends indicate developments that are characterized by changing numbers of customers acting in one particular way. Similarly, trends on the stock exchange can be defined, as they also indicate a certain behavior and development. One problem though is the difficulty in defining the point in time when development can be considered a trend.
If the value stock has for example been increasing for the past three days, it is certainly too early to speak of a trend. If the value of this stock has been increasing for four weeks, on the other hand, it can most definitely be called a trend. For investors who want to base their strategy mainly on the results of Chart Analyses, it is crucial to recognize trends as early as possible. The essential question hereby is when to consider a course development a trend. Unfortunately, there is no exact time span, so that no general rule exists whether or not a one-week long development is a trend. More important are factors and the type of tradable product that allow us to identify developments as trends. Over and above that, trends can occur in many ways, such as short-term, medium-term, and long-term trends.
Short- to long-term stock market trends
When it comes to deciding whether a course or price development is actually a stock market trend, the period of observation is certainly of interest. If the value of the security has been increasing over five or six days it may be referred to as a short-term trend. Short-term trends are particularly attractive to those investors who look at their investment as a speculation rather than a capital investment. Next to short-term trends, there are also medium- and long-term trends. A medium-term trend exists when a trend has been present for a period of time that is longer than a short-term trend. In practice, a trend is considered medium-term after a continuous increase in the value of two or more weeks. Accordingly, a long-term trend lasts much longer.
How can investors profit from stock market trends?
Trends are a considerably helpful tool to most investors that aid in deciding what financial products to invest in. Identified trends are half the battle when aiming for successful trades. Once a trend has been identified, most investors use this information to decide over buying or selling the security. If the rate is currently rising in an uptrend, investors are likely to buy this particular security, while in a downtrend most investors begin selling. Generally, investors have three options on how to behave when a trend has occurred: The 1st option is to follow the trend. This means, for example, buying stock during an uptrend. The 2nd option is to trade against the trend which means selling stocks during an uptrend. Only very few investors decide for acting against the trend, as this is tied to a much higher level of risk but at the same time too much higher profits. The 3rd option is not reacting to a trend at all.
In summary, trends are an important instrument used in technical analysis (Chart Analysis) when trading securities and derivatives. In most cases, stock market trends provide information about possible future developments of the rates of securities and derivatives. However, there is never a guarantee for the rate to continue developing in the direction that the trend currently indicates.