By Adinah Brown

“The Trend is Your Friend”. Five simple words that essentially mean the world to anyone who risks their own or their company’s money when trading in the international financial markets. The real challenge is deciding on which direction the market is trending before you “place your bet”.

Traders use a variety of techniques to give them a sense of future market direction – a financial “tap the barometer” cue. These techniques range from the analysis of market fundamentals and statistical data analysis, often called “fundamental” analysis. Still others, not necessarily mutually exclusively, turn to price charts and computer analysis of pure market price movements. This second type of barometer tapping is termed “technical” analysis. Both forms of market direction analysis are valid, although each has its steadfast proponents who are quick to decry the value of the other team.

A third form of analysis, and possibly one larger than either fundamental or technical analysis is “sentiment” analysis. This essentially involves opinion polls taken from market traders, bankers, businessmen, and others affected by the current and future directions of financial market movements. Sentiment analysis ranges from straw polls to broad surveys performed on many of the key players in the market.

Of course, if there was one form of analysis that worked better than all the others, then everyone would probably be using it, and that would likely lead to an efficient, illiquid, and non-performing market environment. The fact that there is no one method that is superior to any other means that markets are inefficient and therefore provide the opportunity for traders and investors to take advantage of those analysis differentiations to make money.

The one factor that each of these analysis tools has in common is that they are “crowd following”. The greatest amount of money that anyone can make from a market movement is to spot the trend early, and sell out just before it turns. The problem with most forms of analysis is that by the time they provide their signals, the major market movement has already taken place and the opportunity to profit from the move is almost over. Worse still, the late opportunists may take up their positions only to find that the market then moves against them as a new trend builds in the opposite direction.

The best indicator of all is certainly to follow what is called “smart money”. These are the vast sums of cash thrown into and taken out of markets by huge insurance and investment funds, normally on the basis of future anticipated fundamental analysis. Catch one of those moves in time, and you’re “quids-in”. Of course, unless you are working for one of these funds and have insider information of your company’s future market activity, then the best way to follow the smart money is to use sensitive technical analysis. Trend direction indicators and trend-following tools will enable you to take advantage of those large market movements.

About the Author:

Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.