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Stock Price Trend - Continuation Pattern

Here is the truth about stock price trends: it tends to follow something called continuation pattern. Price trends once established, will tend to continue in it direction. This is similar to the law of physics.

Taking at look at the current market, you will notice that indexes like the S&P 500, Dow Jone or Nasdaq Composite are in down trends. Depending on the type of investor or trader you are, you many want to remember this law by heart and constantly reminding yourself about this law.

Some people don't like to use the terms bull market or bear market because they think that they are versatile traders and they can make money in either up trend or down trend. For, me, there is no harm in using any terms you want to describe the market as long as you have great discipline in your investing or trading strategies.

I tend to use the words investing and trading interchangeably because in both cases, they are all about speculation. The difference is probably in the time horizon that each is playing in. At certain points, they can be quite difficult to differentiate.

Whatever you call yourself, in a down trend market, prices tends to be more volatile then uptrend market. This is quite understandable since most people will be covered with fear under this kind of market. For most people, they are more at ease with the idea of buy low and sell high as in any trading business (in the physical world.) The concept of short selling is something quite reverse of what we are used to. The potential risk of losing large amount of money is not remote. Theoretically, holding short position may lead to virtually unlimited about of loses if a stock price move up by 100%, 200% or even 1000% or more. This is different from holding long position. The maximum loss is when the stock price goes to zero, which is 100%.

Enough of digression, in essence, today's lesson is for trend followers. An object in motion tends to stay in motion until external force acts on it. Taking this analogy, a price trend will stay in its direction until major event happens.

For basic investing lessons, here is the ebook: Investing For Beginners - Good investing lesson

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