Trend followers in fashion can be fickle and flighty. It is tough to predict the whims of the fashionistas as to what the “hot colors” or who the “in designers” will be for next spring.
And while it is also tough to know where IBM or AAPL stock will be trading a year from now, there are some basic truisms that trend forecasters can use that apply to all markets.
Here are five basic concepts about trend forecasting that can help set you up to be potentially profitable in the markets.
All Trends are NOT Created Equal – Stock Chart Patterns
If you are looking at a stock chart, examining the price movement over 30 minutes versus 30 days will yield dramatically different results. First and foremost, you need to understand what time period you are considering.
Trends can be classified as primary (long), intermediate and short term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular stock depending on the time frame being considered. It is not out of the ordinary for a stock to be in a primary uptrend while being mired in intermediate and short-term downtrends. This also applies to almost any asset class including commodities and ETFs.
Typically, beginning or novice traders lock in on a specific time frame, ignoring the more powerful primary trend. Alternately, traders may be trading the primary trend but underestimating the importance of refining their entries in an ideal short-term time frame.
A general rule is that the longer the time frame, the more reliable the signals being given. Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend.
But that doesn’t mean that each trend should be viewed in isolation. Taking a holistic approach to trend analysis can be very beneficial. Greg Firman, market analyst for TraderPlanet.com who spoke at the VantagePoint Power User Seminar in February, likened trend trading to automobiles.
There are Two Main Types of Trend Trading – Following and Fading
A trend-following strategy is one used to identify entries in trending markets. The goal of a trend-following strategy is to buy and close a position at a higher price in a bull market, and to sell and close a position at a lower price in a bear market. The most simplistic definition of a bull market is a price pattern of higher highs and higher lows. The most simplistic definition of a bear market is a pattern of lower lows and lower highs.
But according to Firman, markets trend only 20 percent of the time. Therefore, trend following strategies are not always applicable.
A trend-fading strategy is one that is used in sideways or choppy markets. Trend-fading strategies identify opportunities to sell highs and buy lows (the opposite of a trend-following strategy). With trend-fading strategies, traders profit if a position is taken and the market moves back to an established range.
Moving Averages – What Every Trader Needs in Their Trend Trading Toolbox
Moving averages (MAs) are among the most popular tools for trend followers and for good reason. The technique is very effective at identifying trends and enabling traders to maintain their positions until the trend is over. Moreover, by varying the lengths over which the MA is calculated, the sensitivity to smaller price changes can be adjusted to suit traders’ preferences. Shorter MAs involving a smaller number of days or weeks are more sensitive and provide quicker and more numerous signals than longer moving averages.
Traders like moving averages because they smooth out the peaks and valley in prices, are easy to use, and are easy to interpret. To learn more about moving averages watch our recent video here.
These are the positive qualities. The problem is that MAs are a lagging indicator. That is why in 1991, after years of research, VantagePoint’s team developed technology that forecast trends based on moving averages while retaining the positive qualities and reducing, or eliminating, the lag, which is the negative quality.
VantagePoint’s Predictive Moving Average (PMA) takes actual data and predicted data to forecast market trends.
Support and Resistance – Where Market Trends Can End
So how can traders tell when a trend is coming to an end?
“Key support and resistance is the biggest teller – knowing where the buyers and sellers are,” said Firman.
Support and resistance are magnets that draw the market to them. As with any magnetic field, the closer the market gets, the stronger the magnetic pull, and the more likely it is that the market will reach the target. Also, as with a magnet, the market often accelerates when it gets close to the magnet. This momentum often results in either a breakout or continuation of the trend, or a trend reversal. Once the market reaches the target, the magnetism usually greatly decreases. It is as if the market turns off the magnet once it is reached.
If the market reverses or breaks out, it then moves to the next support below or resistance above. In a strong bull trend, resistance usually results in a pause because of profit taking or attempts to pick a top, but the trend then resumes up to the next resistance level. In a bear trend, the market usually falls through all support, although it often pauses at each level because of profit taking or attempts to pick a bottom.
All bull trends end at resistance and bear trends end at support, and if traders know how to read the changes in buying and selling pressure, transition can provide several trades in both directions.
Trend Forecasting – Artificial Intelligence Can Improve Your Success
Many technical indicators, such as moving averages, attempt to filter out short-term price fluctuations so that the underlying trend can be observed. As mentioned earlier, trend traders rely on moving averages because they smooth out the movement in prices, are easy to calculate and understand, and depict the underlying trend. However, a side effect of doing this is that the technical indicators like moving averages tend to lag behind the market and fail to spot the end of a trend.
Such technical indicators are referred to as lagging indicators. This lag effect typically causes the trader to respond late to market changes, resulting in lost profit opportunity and risk of increased losses.
VantagePoint’s research team has invented proprietary computer processes which address these limitations and overcome the lag effect through the development of methods, systems, and devices that combine both actual and predicted data derived from the application of neural networks to intermarket data found to be most influential on each specific primary market.
What that means for trend forecasting is that the artificial intelligence in VantagePoint gives traders a jump on the market. This is a priceless technological edge for traders looking to maximize the trend.
Take your trading to the next level with VantagePoint’s predicted moving averages that forecast trends ahead of the market. Request a free demo here.