When you see articles that say, "Invest in These Trending Stocks," what exactly does this mean? The simple definition of a trending stock is one that increases or decreases in value on a defined slope. It also helps trend traders snatch up profits.
But what exactly makes stocks go on the "Top Trending Stocks" lists and how can you profit from trending stocks? Just knowing the term "the trend is your friend" probably isn't enough to help you determine the best way to invest or trade, but it's a good start.
Let's go over how to identify trending stocks, how stocks become trending stocks, how to cherry-pick the right trending stocks for your portfolio and more. By the time you're done reading, you'll have a better idea of how you can identify trending stocks and how you may want to incorporate them into your portfolio.
What Are Trending Stocks?
A trending stock means that a share of stock is making a significant move, either upward or downward, compared to its underlying index.
Trending stocks can take off or plummet due to a wide variety of reasons, such as a swing in market sentiment, a company announcement or other reasons that cause stocks to change gears. Day traders make a living spotting shares that whipsaw up and down in order to profit from large or small price moves.
What Causes Changes in the Stock Market?
A few key factors can influence and indicate trends, including trade volume, high volatility, news, fundamentals, inflation, market sentiment and more. In this section, we'll take a look at a few things that directly and indirectly affect what affects trending stocks.
- Trade volume: What exactly does trade volume mean? Trending stocks may have sudden changes in trade volume which can help traders identify changes in price moves. It refers to the total number of shares exchanged between the buyers and sellers of a stock during a given trading day.
- Volatility: Trending stocks typically show volatility. When you trade, volatility refers to how the stock increases and decreases over time. High volatility can indicate high risk, but as a trader, it can also pave the way for profit potential for investors. Day traders look for stocks with large jumps from point to point and try to catch a stock on a lull and sell on a high in order to profit.
- News: As you might expect, either worldwide or companywide positive news will influence stock trends. For example, the quarterly positive earnings of a company, a great economic situation and other indicators can cause trends to go one way or the other. Even the political and economic situation between companies (such as the Ukraine crisis) can affect investors. It's important to note that just because a company has certain success in the interim, it doesn't mean that it will continue to stay that way in the future.
- Fundamentals: Fundamental analysis examines a company's underlying business by checking on return on assets, profits, capital management (primarily with shareholder earnings and returns in mind), earnings per share, price-to-earnings (P/E) ratio and cash flow, to name a few.
- Inflation: Inflation, which is the rate of price increases over time, doesn't always negatively affect stocks because companies can pass on higher costs to customers. However, since consumers need to make more strategic decisions about their spending habits, it often leads to slower economic growth. A change in a primary stock in a sector can hamper the effects on the whole sector. When inflation increases, many investors sell their stock because they think the stock will continue to decrease in price. As the demand for the stock decreases, the price of the stock decreases and the stock market as a whole will likely go down.
- Market sentiment: What stocks have been generating the most interest recently? It can help guide your investing. Market sentiment refers to the predominant viewpoints of market investors as a whole to determine possible price changes of a stock. Upward-trending sentiment is considered bullish, while a downward-trending sentiment is considered bearish. Day traders use market sentiment quite a bit when making a determination of how to trade. Market sentiment can occur on a micro level. For example, when a company reports lower profits, investors can lose faith in the company and sell their stock en masse, decreasing the value of the company's stock. Fear can play a huge part in whether investors bail out of a particular stock or not. Put simply, investors worry about losing money and typically sell when the markets get shaky, which affects companies as a whole.
- Government: The government can affect the free markets, particularly through fiscal policies and increasing and decreasing interest rates. Raising or lowering taxes and changing the interest rate can influence the markets. Government decisions can also affect the markets internationally as well. The Federal Reserve System raises the federal funds interest rate in order to control inflation. On the flip side, when the Federal Reserve slices the interest rate, investors tend to start spending, which lends itself toward business growth and increased profit.
- Supply and demand: Supply and demand is one of the most basic economics concepts and refers to the price of an item. Supply and demand refers to the amount of a commodity, product or service available and how much buyers want to buy it.
- Energy and oil prices: Changes in energy costs have an effect on the stock market. An increase in oil prices raises input costs for businesses and reduces the corporate earnings of businesses. The opposite is true when oil prices dip. This also leads to people buying fewer consumer goods.
How Do Stocks Become Trending Stocks?
The value of a stock is tied to the cash flow a company generates. Traders look for fluctuations in stock prices and try to profit from short-term moves by learning about the trend early and making buys inline with this mantra: buy low and sell high.
Variables such as the factors listed above, including liquidity, volatility, trading volume and other market conditions can all determine the stocks that get added to a trending stocks list.
How to Profit from Trending Stocks
Let's take a look at how you may get started profiting from trending stocks, starting with a trading platform.
Step 1: Open an account with a broker.
If you don't already have an account, you need to choose an online stock broker or trading platform so you can buy and sell the stocks you want to trade. Choose a platform, create an account and then fund your account from your personal banking account.
Step 2: Identify trends.
Identifying trends means checking the price of the stock to find out whether it moves in a downward or upward direction. One way to understand whether stocks are going up or down involves charting a pattern yourself to checking charts online from a certain time period. Chart patterns can give you a great indication of how a stock trends, either up or down.
You can also use the “top-down” metric by checking the sector or industry as a whole against individual companies you're considering trading. Looking at individual stocks against the backdrop of the sector can help you pinpoint specific trends.
It's also a good idea to check into strategies such as pullbacks and breakouts. Buying a breakout means a stock price moves outside a defined support or resistance level with increased volume, while buying a pullback means that the price temporarily moves against the underlying trend.
Step 3: Identify stocks with high trade volume.
Above, we've identified different factors that can induce heavy trading volume with a particular company. One of the easiest ways to identify the best stocks with the highest trade volume is to identify a financial website that you like to use that has screeners that can help you look at high-volume stocks during any given time period.
Step 4: Check into investor sentiment and buzz.
The more excitement surrounding a company, the more it may spur people on to get interested in trading that particular stock. The fact that a simple conversation is flowing around a particular stock can turn the stock into a trend, driving increased trading and price movements. However, it's important to know that investor sentiment and buzz may not be the only factors you may want to go on. You may want to dive into more research on the fundamentals, performance, competitors and the wider economic issues at large. Don't ignore chart patterns or advanced technical analysis as well. Knowing the ins and outs of how the stock price moves is an invaluable tool to making a decision about how to trade.
If you don't know how to identify chart patterns in order to draw conclusions about how the price might move, it's easy to find classes online that can help you learn how to get started.
Step 5: Set stop-loss and limit orders and place your trade.
Once you've done your homework, the next step is to log into your trading account, search for the ticker symbol on your broker's website and execute your trade by utilizing the search window on your broker's account. Add in the number of shares you want to buy. Set stop-loss and limit orders, which mean that you determine the exact entrance and exit prices before you execute your trade. A stop-loss order sets the order at a price only as it goes to a certain level and can be your best guard against serious losses. Limit orders are set above the price of the stock and allow you to profit off the trade you've executed.
Step 6: Check your open positions and keep your own rules in mind.
Note your open positions and make sure you monitor your stocks. You shouldn't risk money you can't afford to lose, so set strict parameters into how much you can lose — though you hopefully won't! — when trading specific trending stocks.
Trending Stocks to Consider
Take a quick look at a few of these trending stocks to determine the right one for your portfolio:
Consider Trending Stocks
A trend is one of the most important considerations when trading, and in particular, day trading. Traders want to identify a trend early and exit before it starts to reverse — whether that trend goes either up or down. The most successful traders can identify a trend and exit when appropriate.
There's no question that there's a lot to consider. Between trade volume, volatility, news, fundamentals, inflation, market sentiment, government, supply and demand, energy and oil prices and other factors, it's important to know as much as possible about individual companies and market trends. Many people cannot do this without understanding the ins and outs of trend trading.