Investing in a trend means placing your money in sectors, industries or markets that are expected to boom consistently. When done right, the strategy can lead to major profits. But it isn’t just about throwing your money at the hottest market fad, as investing based on trend requires careful research and sound financial planning.
For example, if you notice that a company’s stock price is rising, and it has been doing so for some time, the company may be experiencing strong demand and growing revenues. As a result, the company’s stock is likely to continue its upward trend. Alternatively, if the stock price is dropping, it is likely that the company will not be able to compete effectively and its profits will decrease.
Investors will take note of these changes and look for signs that the trend is reversing or changing. For example, a stock’s price can drop to an extreme level and then rebound, indicating that the company is making stronger efforts to compete effectively.
Another way to analyze trends is to use moving averages. These lines look like staircases – each one higher than the last – and they are used by technical analysts to gauge a security’s momentum. The more times the price touches a moving average line without breaking through it, the stronger that moving average is considered to be. In addition to looking for trendlines, investors can also examine how a stock or sector is performing in comparison to its previous performance.