One of the oldest sayings on Wall Street is “The trend is your friend.”
A trend is simply a stock’s overall direction, and you’ll need to be able to identify trends to trade off of momentum. The saying, therefore, is a simple truism, which holds that once you identify a trend, you want to roll with it — rather than fight it — so that it can push your trading account along to new heights. Fighting the trend means swimming upstream against the tide, making it harder for your trades to work.
An uptrend occurs when a stock continues to make higher lows and higher highs. This is an indication that market participants are buying the stock; as demand for the stock increases, it drives prices higher.
Here’s an example of an uptrend in Amazon.com Inc. (AMZN), on the daily timeframe.Source: TradingView
The lower uptrend line connects the higher lows, while the upper trend line connects the higher highs. Obviously, if you went against this trend and got short throughout this entire period, you would’ve taken a large loss. If you made the trend your friend and went along with it, it was pretty easy to make money here. With that in mind, don’t go against an uptrend unless you see a pattern or there’s a catalyst event that could change the direction of the stock.
By comparison, downtrends are a series of lower highs and lower lows. When this happens, market participants are either selling out of their position, or entering into short positions. As the selling pressure increases, the stock price tends to fall lower.
Check out the hourly chart on DryShips Inc. (DRYS):Source: TradingView
The lower trend line drawn indicates the stock has been making lower lows, while the upper downtrend line indicates the stock has been making lower highs. If you fought the trend by going long over this period, you would’ve been down significantly on the position.
The bottom line
Don’t go against the overall prevailing trend, unless it’s for a short period of time, such as intraday. Without a catalyst event that could change the direction of where the stock is headed, or a technical indicator that might be signaling a potential change in trend, you will be better off riding uptrends and downtrends rather than fighting them.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.