Because the stock market can jump-up or bottom-out within a given day, it is almost impossible to determine exactly what will happen all the time. In order to have some sort of consistency when trading stocks, it is important for analysts to look at market trends and understand what they mean. The market’s trend can be important to determine a “best guess” type situation about what the market is likely to do in the near future. Let’s take a look at the different types of trends and what they can tell you about the market condition.
The first thing to understand about the market is, when looking at trends, you must always look over the long term. Stocks can rise and fall quickly, called spikes, but over a long period of time, you can generally notice the trend of the market, climbing from left to right.
It is important to understand the time frame of trends because that will indicate the amount of time you need to leave your money in the market. For instance, if you notice an uptrend that is occurring for a particular stock you want to ride it. However you need to look out for dips and sell points. But, remember, there will always be dips. A small dip doesn’t necessarily mean sell. As long as the movement doesn’t dip below the sell line.
When the market is trending down, or falling from left to right, there are still important aspects to consider; possibly even an opportunity for a positive gain to come from the decline. When a market is in a downward trend, there is an availability to sell your shares at one price and then re-buy more of them at a lower price, which will lead to a faster gain once the market begins to return to a normal state.
Another thing to consider in a declining trend is that, over the entire history of the stock market, there has been a positive trend. This means, even after a period like the Great Depression, the stock market returns to an up-trend at the same level if not higher than when the decline began. The key is recognizing bottoms where value makes sense. A price to book value of under 3, 2, or even might indicate a heavy buying opportunity.
Importance of Tracking the Trend
Closely paying attention to the market trend is very important when investing. The trend will let you know how long you should expect to keep your money in the market and what you should do with your stocks.
Remember, in an up-trend, you need to look at the length of time invested and do not worry about spikes in either direction. For a down-trend, you should take advantage of the possibility to sell and buy more stocks at a lower price, thus resulting in a gain situation in the long run.
Learning the importance of market trends is valuable information for any savvy stock investor and is something to pay attention to for the beginning investor, as well. When you understand market trends, you are less likely to panic, which means you are less likely to make errors in judgment when it comes time to buy and sell your stock.
By David Moore