After getting a little more investing experience, you’ll probably know that a market can greatly affect the growth of your money.
If the market goes up, your investment is likely to rise, and the opposite happens when it goes down. That’s why, when you know which direction the market is headed, you’ll have a higher chance of making the right investing decisions.
But what exactly should you be looking at? And how do you interpret what you see? Keep reading to find out.
Uptrends and downtrends
When the prices in a market are clearly moving in a certain direction, this is called its “trend.” While nobody can accurately predict the point at which this trend ends, knowing that it is ‘likely’ to go higher or lower can help you choose your next steps.
Of the 2 types of trends, an uptrend is when prices are on the rise. There may be times when they dip slightly but keep climbing again. As long as new high and low points are still higher than the previous ones, the trend is said to be intact.
On the other hand, a downtrend is when prices are dropping. While there may be short-lived points of recovery, the general direction is downward. This trend will persist for as long as new low and high points are progressively lower than before.
When there is a lot of movement but the direction isn’t clear, this is called a ranging market or sideways market. In this, prices will have an upper boundary (resistance) and lower boundary (support), both of which may change over time.
The main difference between a ranging market and an up- or downtrend, is the consistency, or lack of it. The volatile movement of prices in a ranging market make it impossible to see a trajectory, while it’s pretty easy to see where the market is headed in an uptrend or downtrend.
What to do
When you identify an ongoing uptrend or downtrend, you can then decide on your next steps. You can choose to ride the former by increasing your investments, or put money in defensive assets to mitigate your losses during a downtrend.
Remember though that you don’t always have to react to a trend, regardless of whether it’s heading up or down.
If you’re investing for the long term, continuing to follow your strategy may be the best for you regardless of how the market is doing. That’s because you’ll probably have enough time to earn from the ups and recover from the downs by the time you need the money.