Investing in the stock market with a long-term view certainly has a lot of benefits. Most of the legends in stock market investing like Warren Buffet recommend long-term investing. However, you need to learn how to identify the long-term stock market trend before you invest in a particular stock. There are several tools that can help you in this endeavor. One of the most powerful tools could be trend following.
Trend following
Stocks seem to have a certain inertia of their own which tends to keep them in their current course unless something drastic happens to change their course. This momentum can help you predict a stock’s future movement, based on its past performance. This is basically the premise of trend following in a nutshell; although there is much more to it.
A trend line is often used in trend following to plot the course of a particular stock in order to predict its future movement. If you can spot a trend, then you would have a much better advantage over other investors trading in the same stock.
You can identify a trend by marking a series of three points on a graph. When you can locate three consecutive higher highs and higher lows, it would indicate an up-trend. Likewise, when you find three consecutive lower highs and lower lows, it would indicate a down trend. A sideways trend can be spotted when the upper and lower points travel along parallel lines, more or less horizontally.
The longer a stock has been following a particular trend, the stronger would be the tendency for that stock to maintain its current trend in the future. This fact makes trend following more accurate for long-term investments. Because, when you focus on the long-term, you are analyzing data over a long period of time. You can therefore see a wider picture that presents a wider perspective of a stock than a short-term investment. You would then be in a better position to spot long-term trends more precisely and use them to your advantage in predicting future trends for your stock.
Trend following can help you base your decisions on accurate data rather than on emotional impulses that can force you into making spur-of-the-moment decisions that can take you in the wrong direction. Of course, it takes discipline, perseverance and courage to stand your ground no matter how much the market fluctuates in the short-term. But once you learn how to identify the long-term stock market trend, you will be able to profit from investing for the long-term.
