Every year, certain trends will shape the market … and the direction of certain stock prices. As a swing trader, one of my personal goals is to identify these trends before they gain traction, so that I can predict momentum before it happens.
But here’s a good question: Once you suspect a market trend is at play, how can you confirm it? As it turns out, there are steps that you can take to get a better idea of the potential of a trend.
In this post, I’ll explore some simple methods for confirming market trends.
How to Confirm Market Trends
Here are some methods that can help you confirm market trends…
Read the news. You never know where you might get ideas about the next hot sector or potential trade. Keeping on top of the news can help give you some great direction.
Staying updated on the news, both related directly to the stock market and world news at large, can keep you updated on events that could shape and affect stock prices.
Have a thesis. Before you can confirm a market trend, you need to have an idea of what you’re looking for. This will require forming a thesis about the trend that could be in play.
For example, you might read a piece of news relating to a certain industry and form a thesis that stocks within that sector could experience stock prices based on it. By doing this, you can give your trend-hunting expedition a little more focus.
Look for sector leaders. Usually when a sector heats up, there are a few companies that are leading the pack. These are considered sector leaders.
These companies can affect the sector at large, so by locating these leaders, you can gain some valuable information about the strength and power of a trend. This can help you determine things like whether the trend might inspire sympathy plays.
Form a watchlist. With too many stocks to consider, it can be difficult to focus. To reduce confusion and make the most of your time, narrow it down to a few stocks that are in keeping with your thesis to form a watchlist. By focusing on a key few stocks, you’ll be best prepared to take advantage of opportunities if and when they arise.
Look at the charts. Opinions on potential stock movement can vary, but charts don’t lie. Looking at charts can help you determine structured entry, stop loss, and exit points for trades, allowing you to be organized and tactical with your trading plans. By doing this, you can potentially minimize losses and maximize gains.
Look for patterns. When looking at stock charts, patterns can help indicate the future direction of a trend. For example, when approaching a long chart, if a stock meets my personal criteria, I might look for a 2–3 day rest pattern or a slow stochastics 20 pattern. Every trader will have his or her favorite patterns; look for the ones that work for you.
Look at earnings reports. Earnings reports can reveal a lot about a company’s past … and its potential in the future.
Be sure to review the most recent earnings reports — both the numbers and the commentary. Both strong and weak earnings can inspire sympathy plays, so earnings reports can really help you confirm market trends.
SwingTrades with Paul Scolardi
I’m Paul Scolardi, a swing trader and the lead teacher at SwingTrades.
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What steps do you take to confirm market trends?