A whole library could probably be created to house the infinite methods of investing in the stock market. Obviously the goal is to find the best one that you understand how to use and the one that brings in the most profit, of course.
When it all boils down to it, trading stocks can be as simple as you want it to be, and that is what I am about to share with you: the idea of the trading trends. Basically the type of trade states that stocks do not move in simple up and down patterns, rather there are up, down, and sideway movements. All three inputs are what create three distinct trends. Taking this further we find odds of a slumping stock is less likely to just skyrocket back up before experiencing some form of sideways movement, also called consolidation.
What is the significance of all this? Our risk has been minimized greatly. With the trend trading, we are not looking to spot tops or bottoms, but we are looking to lock in on the stock after the new trend has been created. We wait for the stock to build a foundation in the consolidation period, and then jump on it after the stock breaks out of its sideways trading range.
The beauty of the trading trends is that it allows us to avoid “fake” trends. How many times do traders think they have called a bottom only to get duped into the stock heading even lower, which results in a loss trade? Once again, by waiting for the sideways movement to complete, we can see whether the stock is actually planning on continuing the lower trend or if the stock is, indeed, heading towards an upward trend.
For the trend trade, our price target is at the spot of resistance or support of where breakage occurs. That point then turns into the support or resistance.
In the example of Energy Conversions (ENER), we see the stock eventually hit a point of resistance (higher blue line). Many people would jump at the conclusion that the stock had topped out, so they might possibly short the stock. Later down the road, ENER created the support (bottom blue line). Now these shorters probably got scared and tried to cover themselves by going long and spending excess money on commissions and other losses.
The bottom line is that we do not have a clear sense of which direction the stock wants go. In the example of the first chart above (INDU), we see the chart go into a consolidation period. At that time, many people thought we hit a bottom. The problem was that we actually did not. In fact, we just created a even stronger downtrend.
Overall the trading trends is meant for those looking for a simple and limited-risk trading method that allows them to profit off solid trends. Using other technical analysis and chart patterns, we can obviously extend our use of trend trading.