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Chapter 3- Explain the Day Trading Strategy Known as Trend Following

Understanding the Opportunities behind the Day Trading Strategy of Trend Trading

The investment environment offers many opportunities for individuals to take advantage of when it comes to finding financial success through personal investment. While there are many different resources you can turn to in order to accomplish the goal of investment success, it is often advisable to select a strategy that will benefit your personal situation. To help increase an individual’s comprehension of the potential strategies available, the following addresses the various opportunities behind the day trading strategy of trend trading.

Trend Trading Defined

Trend trading has quickly grown to be a significant trading strategy individuals take advantage of to improve financial success. For the day trader, the idea of following trends provides a sense of security, as an individual either utilizes current information that supports a potential trend or follows years of data that has revealed a potential trend.

The trader utilizes this strategy in an attempt to improve their financial standing by analyzing the momentum of different assets, which either a rise or fall. This can prove highly beneficial when a person successfully identifies trends, since they can either follow positive trends and earn money in the market or follow a declining trend while waiting for a turnaround to occur and the best time to invest in a particular stock or commodity.

Positions Available

For the day trader, it is always important to identify the best strategy to take when identifying the various trends available. One of the best features of following a trend trading strategy is you can either select a short, intermediate, or long term approach towards the different trends possible.

Short

When taking on a short term approach, a day trader is seeking to capture a trend that is occurring as a result of different elements such as new products, a company announcement, or the decline of a competitor. This short increase in value can offer significant return when properly followed and sold prior to any decline that often follows a sharp increase in value.

Intermediate

Intermediate approaches can incorporate different elements such as new products launched, particular seasons, as well as scandals that may reveal a sudden decline within a particular stock. Tracking these trends often means waiting longer then the short term approach but maintaining and eye on the investment before a reversal of value.

Long

The long term approach is a strategy many day traders do not take advantage of, yet it can offer a significant return on investment. When you find a new company or company that has launched a new product it is a good idea to follow a long term approach to get a greater return on investment as the stock continues to climb due to the impact of the product or new company.

Market Applications

When looking at where you can pursue trend trading, the two most common markets are found with stocks and commodities. These markets are familiar to many day traders and offer the best possibilities for identifying a short, intermediate, or long term approach for trends.

Stocks

The stock market is arguably the most popular resource individuals turn to when it comes to discovering trends to access. This market is filled with different industries that are regularly fluctuating and can be impacted by various elements. From new products being developed, to companies collapsing, to mergers succeeding, the stock market offers variety and opportunity for the trend trader.

Some of the most predictable trends available for individuals to take advantage of are found with product releases. For example, Sony found an increase in value when they released the PlayStation III, similar to Microsoft receiving an increase in value when they released the Xbox 360. With the release of such a significant product, a trend can be identified where it would increase stock value over a certain period of time. Once the initial sales and marketing had concluded, a reversal of value was seen, identifying when day traders should have concluded their investments.

Commodities

Another market of opportunity available to individuals when it comes to implementing the strategy of trend trading is with commodities. This marketplace is defined as the foundation of trend trading and the idea of following different patterns within the market. For an individual seeking success in commodities, it is often valuable to accumulate years of information to find specific trends or patterns.

Perishable commodities such as fruits and vegetables are often a strong market for identifying trends as a result of elements such as seasonality. With this strategy you can identify different seasons where products are available and an increase in value can be discovered. Additionally, a decrease in value can also be identified when certain products or unavailable as a result of seasons.

There many diverse strategies a person can take advantage of when it comes to finding success in investing and the strategy of trend trading has proven highly successful for many investors.