How to Trade Trends

A trend is a pattern of behavior that seems to be present in a given group at a certain time. It can be found in fashion, pop culture and even in the economy, where the stock market may go up or down depending on economic indicators. It is important to be able to identify trends so that you can make informed decisions about trading with them, but also to understand how they form and what sustains them.

There are many different types of trends, but the most common one is a change in behavior that seems to be present across a group. This change in behavior can be a result of an event or a societal shift. It could be as dramatic as the 14th century phenomenon where everyone painted their faces white with powder, in order to demonstrate wealth and avoid sunburn. This was a way to leapfrog class boundaries, where the lower to middle classes would emulate the behaviour of the upper classes, in order to try and achieve their status.

Fashion is also a huge source of trends, where the shape, style and colour of clothing can be dictated by a theme or an event. For example, a high necked lace dress worn by Kate Middleton at the Royal Wedding saw a huge rise in demand for similar dresses from boutiques, as women wanted to emulate her look. The shape of the garment can also be a trend, as in the case of the boyfriend shaped shirt or jumper which became a success because it was a response to an overall theme of wanting to feel more comfortable and at home in clothes.

Trends are important to traders, as they help them to identify opportunities for profit. They can be based on fundamental factors about the underlying financial asset or a combination of both, and can be either upwards (a bull run), downwards (a bear run) or sideways (sideways). Trend lines are a popular tool for technical analysts to use when identifying trends, as they are an easy way to identify a rising or falling trend, or even a potential reversal.

Other tools used by technical analysts to identify trends include candlesticks, support and resistance levels and chart patterns. However, it is important to remember that the trend can be influenced by human emotions such as fear, greed and confidence. This can lead to changes in prevailing market sentiment, which can impact on the strength or direction of a particular trend. The most successful traders are those who can recognise these signals early on and trade accordingly. They can then take advantage of the momentum that a positive trend has, while simultaneously closing their positions before it reverses. This is called ‘timing the market’, and can be the difference between success and failure. Click here to learn more about trend analysis, or sign up for a demo account to start trading right away.