Trend Following and Technical Charting may seem very similar to the layman, which is why I am presenting them here together, though there are some differences. What is the definition of each? Let’s go to a third party:
Trend following involves identifying a trend and trading with a trend after it has started – with a system often designed mathematically. For more detailed information, I will take the definition from Michael Covel, who has basically – as an author, researcher and systems teacher – created a whole career for himself out of studying and promoting this investment style. Here’w what he says:
Trend following trading is reactive by nature. It does not forecast or predict markets or price levels. Prediction is impossible. Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and current market volatility. Trend traders use an initial risk rule that determines position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, A trend trader’s average profit per trade is significantly higher than the average loss per trade. to read more from Covel’s page, click HERE (not a recommendation, just a reference).
Technical charting is the study of charts to identity ideal points of entry into a trade and ideal profit targets. It also helps a trader to identify an exit point if the trade is not moving in the intended direction. There are various types of charts but the key is that a technical chartist will not use company financials to make a decision on buying and selling. They are trading the price action – believing that the changes in price, reflecting the emotions and decisions of the market, are the best indicator. For more information on this, go to this Wikipedia page on charts. You can also check out a few traders’ sites – as some successful traders also write interesting articles and posts. (not recommendations, just reference points).
In summary, both trading styles use price action of the securities in question (a commodity futures contract, a stock, an index) and not company specific or industry specific data. Some traders do use a combination of fundamental and chart/price action to make trade decisions, but many do not. I do not recommend or endorse any trading styles on these pages, they are here for a quick reference for you – not as a recommendation to use them (that’s your decision).
Jake from Shark Investor wrote up this detailed post on spotting downward chart trends: