Written by A.J. Brown

Is the Trend Always Your Friend?

Trend TradingTrend trading is a perennially favorite topic among traders. And "The trend is your friend" is probably one of the most famous and repeated phrases within the trading community.

But platitudes like this can be deceiving. Is the trend always your friend? And is it profitable to trade trends? Well, the answer is a bit complex…

In general, you want to trade the same direction the market is moving. If the market is going up, and you randomly pick a stock to trade, chances are it will be going up, too. This is the definition of a trend.

Now, obviously, you wouldn’t randomly pick a stock to invest in, but it demonstrates the point that in a bull market most stocks will be increasing in price.

Likewise, in a bear market most stocks will be declining in price.

Here’s the question: Where do fundamentals come in?

The answer: I have found it depends on how long you plan to be in you trade.

In my experience, in the short-term, fundamentals have little bearing on price movement. But in the long-term (three months or longer), fundamentals are actually quite important.

If you are in a bull market and you’re taking a long position, you want to make sure the stock you’re buying is fundamentally a solid stock. In other words, there should be a reason the company’s stock is increasing in price.

If you don’t do this, you take a big risk… because… a stock that is increasing in price during a bull market could still fundamentally be a bad stock.

The company might have too much debt or declining market share or a host of other problems. And the only thing propping up the price of the stock might be the trend of the market.

In a case like this, you could get badly burned.

So while trends are very important, trends alone don’t make for good long-term trades. For a long-term trade, the trend must be in alignment with the fundamentals driving the stock price. When these two are in alignment, then the saying "The trend is your friend" becomes much more reliable.

Let me be clear: What I’m telling you here is important *if*  you plan to be in a position for three months or longer.

In my experience, it does not apply to short-term trades.

I personally don’t teach long-term trading strategies. I teach a strategy designed for short-term trades between three and 40 days. I’ll tell you more about it soon. Stay tuned.

Best regards always,

A.J. Brown

Categories: Lessons / Options / Trading

One Response to “Is the Trend Always Your Friend?”

  1. David Ray @ 10:15 am:

    A great post and very true!! We often fail to consider the points you make. Thanks.

    Dave

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