Day Trading Trends

Why is it that traders seem to be obsessed by identifying day trading trends in financial markets? Do they really matter and how can they help you?

To start with, the trend is a clear and distinct direction, up or down, that the price is moving in. If you study many charts, you will see that sometimes the price seems to be going down, sometimes it seems to be going up, and at other times it can be rather aimless, jogging up and down around the same level.

Sometimes it's hard to identify a clear direction, even if a share price increases month after month. There always seem to be a few days when the share price drops. But it's all a question of what timescale you are considering trading – a long-term investor would be very happy with a share that increases in price every month, whereas a daytrader might find too many losing trades in that.

Despite that, one of the most important trading rules is that you follow the trend. This is simply because your aim is to buy shares (or sell them short), let the value change over time, then sell them for a profit. It's been shown that trends tend to continue for a while, and indeed they can build up a momentum in the direction of travel. If you want to buy shares and sell them at a higher price, it probably doesn't make much sense to buy some that are currently losing value.

To be sure, at certain times and places the movement of the price may reverse, and start going in the opposite direction. Some traders might consider making trades in anticipation of these reversals, which will often happen at price levels, such as support and resistance, which you can identify in advance. Even so, it is an extremely bold and risky trade to assume with no other evidence that a trend will reverse simply because it is reaching one of those levels. It is customary to at least wait until the chart is showing some sign of a reversal before jumping in.

There are several ways of identifying a trend, which can be difficult just because prices tend to go up and down even while they are moving in one direction or the other over time. The classic definition of an uptrend is that you can see successively higher price peaks and higher price troughs as time passes; the opposite would define a downtrend. Another way to picture the movement of a trend is to plot a moving average on a suitable timescale, and observe if it is consistently going up or down.

It is interesting to note that upward trends tend to be slower than downward trends. To support an upward trend you need a supply of buyers who want to pay what it takes to own some shares, and you need a continuous flow of new money. Generally, traders buy into an uptrend with a feeling of positivity. On the other hand, when the shares are falling in value the owners may start feeling fear and panic, and because of these negative emotions downtrends can be a lot stronger and sharper than uptrends.

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