Regardless of your trading style and the assets you’re investing in, the basic principle of investing in stocks, commodities and currencies is that “the trend is your friend”.
Trading is all about monitoring the momentum of the markets, enabling you to ride the wave of both upward and downward trends. You need to anticipate the high or low point of each movement so that you can sell at the highest price or buy at the lowest point.
A successful trader will often use two complementary approaches: technical analysis and fundamental analysis. The first method relies on charts, which show the trajectory of an asset in real time. Fundamental analysis, on the other hand, is all about research into the strengths and weaknesses of companies, types of equities and entire economies. Reading news articles and in-depth reports will give you a deeper understanding of how a particular stock or market is likely to perform, but technical analysis, on a number of different timeframes, represents the real mechanics of trading.
What is a trend?
The first step is identifying a trend. The price of an asset usually moves in one direction – that’s the trend – but it’s seldom in a straight line. The price might rise – a rally – until it reaches a high (or peak), and then a correction or sell-off will occur, as large numbers of traders decide to ‘get off the train’, resulting in a low or trough. When there’s no clear upward or downward movement for a certain time period, it’s known as “lateral consolidation” or a “range”.
Highs and lows happen constantly, and “day traders” can, for example, access charts representing 2-minute, 5-minute, 15-minute and 60-minute periods. Each trend on a 2-minute chart is a small fluctuation within a larger 5-minute trend, and so on. A “scalp trader” trades even shorter time periods – often just a few seconds.
A “swing trader” will generally trade over a period of between a couple of days and a few weeks, while a “position trader” focuses on the long-term, over several months or even years. When viewing a chart, you can select different time periods, enabling you to zoom in on short time periods or pull out to see longer-term movements.
Different strategies can also be thought of in terms of the “Dow theory” of trading. The “primary trend” refers to position trading, where general “bullish” (upward) and “bearish” (downward) movements occur. The “secondary trend,” usually lasting between 3 weeks and 3 months, often counteracts the direction of the primary trend. The “minor trends,” lasting less than 3 weeks, cover the smaller movements that swing, day and scalp traders rely on to make profits.
Technical analysis enables you to observe trends within trends, giving you the opportunity to make short, medium and long-term gains. When trading online with a platform such as UFX.com, you can also take advantage of advanced trading tools to help you visualize the various trends of the assets you’re trading. Even a complete novice can quickly come to grips with the basic principles of using charts to execute an effective trading strategy.