Why Trading With the Trend Works

Everyone has heard it, trade with the trend, don’t fight the trend, but why does it work so well?  Well the simple answer is emotions, more specifically fear and greed. 

These two emotions are what cause technical analysis to work. But they are not the only reason; below are 3 reasons why technical analysis works so well.

1.       Greed

When a stock starts going up, everyone rushes to it because they do not want to miss the opportunity.  As the stock continues to head up more and more people hop on the bandwagon because it is going up and everyone believes that, for whatever reason, it will go up to infinity.

Greed gets people into a stock and it causes an uptrend to last, and pushes stocks to more and more of an overvalued level.  So as long as there is greed up trends will occur, and be profitable.

2.       Fear

On the opposite side of things fear causes the stock market to keep trending down.  When that stock does finally start to fall everyone panics and they all start thinking that the stock will go to $0. Because of this everyone starts selling everything that they own, which in turn causes the market to continue trending down.

3.       Traders

Eventually people noticed that these same patterns occur over and over again throughout history. So, people started trading these patterns.  As there became more and more traders in the world the patterns became more and more reliable.

The more people that traded these signals the more accurate they become. 

Technical analysis realizes that people move the markets not fundamentals.  A company can have the strongest earnings and still crash if people sell it, it is as simple as that, which is why things like chart patterns and trends work to create consistent results in the market.

For more on technical analysis visit http://www.stocks-simplified.com/technical_analysis.html