Trends are like a surprise, you never know where the next one is coming from. Trends however, are a little more predictable. In today’s digitally fast-paced society, with social media and so many ways to receive information, trends are now easier to read than ever. Some people can look at trends as similar to fads, but trends are more useful and tend to be in response to a need. Trends often come with facts as well, there’s usually a good and useful reason as to why trends shift. This is why successful traders use trends as a basis for trading.
“Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.” – Jesse Livermore.
While most agree to some extent, one must not be over zealous. After all, following the crowd is not always the wisest thing to do. When trading is based on trends, some believe it is best to stay slightly ahead of the curve. In other words, get in early and get out just in the nick of time.
As billionaire George Soros said, “volatility is greatest at turning points, diminishing as a new trend becomes established.”
The most successful investors and traders see the trend before it becomes a trend. Here are five tips to recognizing emerging trends and how to use them to your advantage when trend trading.
1. Follow The Big Boys
They say money makes the world go ‘round; big money investors also make the markets go ‘round. Like a queen in chess, it’s important to pay attention to their moves. Some players are so big, they could change the landscape of the marketplace with the stroke of a pen. Trend trading should start and end with them. The best way to stay on top of the trends of some of the major traders and investors is to follow the most influential financial publications. These include Forbes, Money, The Wall Street Journal, and many others. Some of the best information for emerging trend trading markets can be found between the pages of those particular publications.
2. Keep Your Ears to the Streets.
It’s a belief that all trends start in the streets, or at least have to be embraced by the streets, so they matter. Based on several experiences in the United States, many trends start up north or out west and work their way down south. It also seems that the foreign markets are often ahead of the U.S. with certain trends. The best way to stay abreast of trends is to watch and talk to people. Trends also often start with young people. It’s also important to talk with fellow traders, the successful ones preferably, when trend trading. In this day and age, the Internet has also become the streets. Read message boards and pay attention to emails, social media, etc.
3. The Media Matters
People like to bash the media. They like to write it off as some wannabe mind control mechanism; some conspiracy theory, they run the world type of scenario. In reality, the media has always helped expose trends in society and put them on blast. If the trend starts in the streets, you could say it ends with the media. Once the media gets a hold of a trend and it gets out there, it’s no longer a secret. This means you no longer have the inside scoop. Try to identify investing trends before the mainstream media puts it under a microscope. Also, social media and the Internet (blogs, message boards, etc.) is different from the mainstream media, which is considered to be the major television networks, radio, and newspapers.
4. Timing is Everything.
The saying speaks for itself. If you get in too early, the market could shift and turn against. If you get in too late, you could miss the opportunity for maximum return on investment. You should use a cycle indicator and wave counts to accurately help you gauge when to jump in on the trend trade. You could say, better a little too early than too late. But sometimes, depending on the trend, you may want to consider hedging your positions with options and/or futures.
5. Manage Your Risks Wisely
Investing is a gamble, everyone knows that; and like all gambling, it can be quite contagious. To avoid temptation, you should set a budget or limit as to how much you’re willing to lose. It can be a risky business in the market and you should be prepared with a number in mind. How much are you willing to put on the table when trend trading? While considering your risks, you should also remember not to take anything personal when trend trading. Your decisions should be based on facts and the tips discussed above. Utilize effective money-management techniques and use protective stops to help limit the amount of loss you’ll accept on every trade.