Simple Stock Market Trend Analysis: Even you can do it!

Trading Financial Events & News

Who hasn’t heard of the old saying “Buy Rumor & Sell News”. And we have witnessed it happening many times, but lacked the courage to trade rumors as all we need is a little conviction, which enters the play once the news confirms. However, it’s too late to enter the game on news confirmation as punters have already played it well and now its time the smart money moves out. Yes, this is how trade goes and those who wait for hard facts tend to buy stocks at expensive valuations.

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So, the right way to trade the tide is to go by the saying and ride the trend, and make sure you cash out before the tipping point arrives on news confirmation. This strategy works well in case of earning announcements, mergers & acquisitions, patent approvals, and court case decisions.

Plan Your Exit

You must remember that the froth starts building weeks prior to such announcements, so all you need to eye on is the tone of the rumors. If the rumors are positive for the company then you should not fear to ride the trend up and in a bearish outlook position your shorts around recent highs. Also remember that’s it’s a game play for high risk traders, so be prepared to coupe with unexpected losses.

You might argue that why to exit the position before the final announcement should hits the trading floors, as the stock might continue with the trend for much longer? Yes, that may happen and it does when expectation build-up is genuinely poised. But the risks are way too high as news confirmations may completely wipe out the momentum if something unexpected comes out.

Another key note for options a trader in such scenarios is that the implied volatility is likely to take knock after the rumors are confirmed and this can lead to excessive cuts in the premiums.

Utilizing Top-down Analysis Approach to Trade the Trend

Simply put, this approach involves trading individual stocks which are more likely to move with the macro trend in the market. So you should first analyze the bigger trend in place and then look around for individual stocks that are fit to move along with more ferociously. While doing so, you should track the momentum in major indices such as Dow Jones Industrial Average, S&P 500, and NASDAQ 100, and then select stocks which move along with broader index. But make sure you do not lose the track of prevailing macro trend as when it changes direction you will have to readjust your position.

This approach is viable for short term traders who mostly try to capitalize on current stock market trends.

Identifying Sector Rotation in different economic Cycles

Economic conditions keep changing and so does the preference for investing in certain sectors. So, its important to keep a track of the current trend and be certain about the phase of the cycle you are experiencing as sector rotation is an almost certain thing that happens in the stock market.

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So, what is your next step?

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