Talk to any financial advisor about securities and option trading and they’ll immediately start talking about trends – trends in the global market, in the specific security’s history, in a specific industry, and everything in between. It’s vital to understand these trends and how you can use them to your advantage when making investment decisions.
Paired with up-to-date option trading alerts to help you catch market changes as they happen, identifying and understanding trends is one of the most valuable assets to your investment portfolio.
What Kind of Trends Are We Talking About?
In option trading, when you hear someone talking about trends, they’re talking about upward, downward, or sideways trends to describe the behavior of a given market. These are ways to conceptualize the behavior of securities and whether their performance is on an uptick, downtick, or constant. This informs almost any decision you’ll make about the security.
Why is it Useful to Identify Trends?
There are very few absolutes in markets. Most of the time, when you’re talking about option trading and getting a return on investments, that’s not a matter of a single value – it’s a matter of the change in the market over time. Understanding and identifying trends is one of your most valuable tools when it comes to planning your trading strategy, evaluating the success of your portfolio, and making investment decisions in general.
How to Use Trends to Guide Investment Decisions
Before You Buy, Sell, or Exercise
Before making any move in option trading, you need to be able to identify what the trendline of a given security is doing. That means looking back on an option’s past performance, evaluating the information available to you, and using that information to project what you think the trend will do in the future.
Types of Trends
Technical Indicators
Analysts and investors use technical indicators like moving averages, movement indicators, and relative strength indicators to find trends in security pricing and volume. Relative strength indicators are particularly useful when comparing markets.
Trendlines
When someone talks about a security or market being on the uptick or downtick, they’re talking about trendlines. They’re an easy, clear way to cut through the noise of daily fluctuations and see the bigger picture.
Tops and Bottoms
Top and bottom values show the prices where trends on a security or market tend to switch direction. It’s common for investors to take great care to time their trades along with tops and bottoms, but they can be very difficult to spot. If you use tops and bottoms in your investing strategy, make sure you trust the person or entity calculating them.
This certainly isn’t an exhaustive list, but it’s enough to get you on the right track. As you learn more, you’ll find that you have the knowledge to discuss market and investment trends competently, which will help you ask the right questions of yourself and any financial advisors you may be working with – and the best investing decisions are always the most well-informed ones.
