How to Use Trends to Make Money in Stocks

TL;DR

Investors can use trends by favoring stocks already rising in price and watching for repeated signs of exhaustion before a reversal. Technical analysis studies the behavior of stocks, interest rates, commodities and currencies, rather than the goods or services behind them. Moving averages can clarify direction, while anchored volume-weighted average price reflects actual trading history. Read on to understand why trend direction matters and how these indicators differ.

Transcript

one of the things that I think gets lost um with most investors is that they they don't understand what technical analysis really even is um you know they think it's uh you know charts on a screen and squiggly line go up squiggly line goes down like my college buddies they're like oh you see nobody knows what you do that's quickly lineups when you ... Read More

Key Insights

• Behavior differs from business: Technical analysis evaluates how a market instrument behaves, whereas analysis of products and services addresses the underlying business. The Apple example separates admiration for products from investment results. A company can make things consumers love, but discussion of it as a great stock ultimately depends on whether its shares appreciated and rewarded investors.
• Longer horizons still need trends: The speaker rejects the idea that technical analysis belongs only to short-term trading. He says it works more strongly as the time horizon becomes longer. For a long-term investor, understanding whether an asset is advancing, declining or lacking direction is therefore central to the investment decision rather than a concern reserved for frequent traders.
• Trend persistence shapes selection: A rising stock is favored because its current direction is more likely to persist than to reverse without warning. This is a probability-based observation in the discussion, not a promise that every advance continues. The selection process begins with demonstrated strength, then watches for evidence that the established behavior is becoming exhausted.
• Reversals often provide warnings: Stocks and stock market indexes do not necessarily move from healthy advances to collapse without intermediate evidence. The speaker says signs of exhaustion tend to appear repeatedly before a trend completely reverses. That makes observation of weakening behavior important, since it can challenge the assumption of continuation before the broader decline fully develops.
• Price itself signals bullishness: The speaker's favorite bullish condition is not a complicated pattern or indicator. It is simply a stock rising in price. An upward move gives the stock a directional advantage because continuation is considered more probable than a random reversal into decline. Indicators serve the trend assessment, but they do not replace this direct observation.
• Moving averages are filters: A moving average smooths a sequence of volatile prices so the underlying direction becomes easier to recognize. It does not create a trend and is not presented as a universal buy signal. Its practical function is to remove some noise, allowing an investor or trader to judge whether directional behavior is present.
• Crossovers can reveal confusion: Moving-average crossings are not always evidence of a useful new signal. When several averages repeatedly cross one another, the speaker interprets that activity as a possible lack of genuine directional trend. In that environment, the smoothing lines are exposing indecision rather than identifying the kind of sustained upward movement he prefers to buy.
• Time horizon changes settings: Different periods can support different participants. A long-term investor may use a 10-month moving average, while a short-term swing trader may use an eight-day and 21-day crossover. These examples show that the indicator period should correspond to the intended holding horizon, even though every moving average remains only a smoothing mechanism.
• Ten months offers slow confirmation: The 10-month moving average appeals to the speaker because it changes slowly and suits longer-term investors. He notes that when the S&P 500 closes above its 10-month exponential moving average, it is probably not in a downtrend. The associated trend-following rule is to own stocks above that average and not own them below it.
• Ordinary averages lack transactions: A standard moving average is described as an invisible calculated line. It averages other prices, but no trading necessarily occurred at the line itself. Because it has no actual price history of its own, the speaker sees less market memory there than at an anchored volume-weighted average price derived from traded price and volume.
• Institutions track execution quality: Anchored volume-weighted average price matters because traders handling institutional orders are evaluated against it. The example involves acquiring 10 million Exxon Mobil shares over five days. A trader receiving better prices than the broader market benchmark is performing well, while one who cannot beat the benchmark may lose the next order to a competing trader.
• Benchmarks can shape reactions: Because institutions monitor volume-weighted average price, it is more than a visual smoothing device in the speaker's framework. Actual incentives and trading history are connected to the level. As price approaches it, market participants may fade the move, helping the level operate as support or resistance and making it the speaker's preferred smoothing reference.

Questions & Answers

Q: How do you use trends to make money in stocks?

Start by identifying stocks that are already rising rather than assuming a weak stock will reverse. The speaker considers rising price the most bullish behavior because an established upward trend has a higher probability of continuing than suddenly turning down. Use technical analysis to monitor the behavior of that trend and watch for recurring signs of exhaustion. Moving averages can reduce noise, while anchored volume-weighted average price can identify levels tied to actual trading history. The method works by following observable direction instead of relying only on opinions about a company's products.

Q: What is technical analysis in investing?

Technical analysis is the study of market behavior. It examines the behavior of stocks, interest rates, commodities and currency prices, rather than the goods and services in which a market deals. Charts and patterns can be tools within that study, but they are not its complete definition. The purpose is to understand trends and evaluate what prices are actually doing. This distinction keeps the analysis focused on investment behavior and price appreciation.

Q: Why does a rising stock remain attractive?

A rising stock already has evidence of upward direction. According to the speaker, it has a much higher likelihood of continuing to trend upward than completely reversing at random. That makes demonstrated price strength a preferable starting point when choosing what to buy. The reasoning is probabilistic, so the investor must still look for signs of exhaustion. Those signs matter because they often appear before a stock or market index begins to fall apart.

Q: Does technical analysis help long-term investors?

Yes, the speaker says technical analysis works better as the time horizon becomes longer, not shorter. Long-term investors need to understand trends because asset prices do not behave randomly in his account. A slow measure such as the 10-month moving average can help them identify the broad direction while filtering shorter-term volatility. The S&P 500 closing above its 10-month exponential moving average suggests it is probably not in a downtrend. This gives the investor a simple way to align ownership with the prevailing direction.

Q: What do moving averages show?

Moving averages smooth volatile price data and help remove noise from a chart. Their purpose is to make a trend, or the absence of one, easier to recognize. They do not represent an independently traded price level because they are calculated from other prices. If several moving averages keep crossing one another, that can indicate that the market lacks a clear directional trend. Their value therefore comes from clarifying behavior, not from predicting direction on their own.

Q: Which moving average does the speaker prefer?

When pressed to choose a standard moving average, the speaker selects the 10-month moving average. He likes it because it is slow and useful for longer-term investors. One basic system is to own stocks when the market is above that average and not own them when it is below. He also says an S&P 500 close above the 10-month exponential moving average probably means the index is not in a downtrend. His broader preference is still volume-weighted average price because it incorporates actual market activity.

Q: Why use anchored volume-weighted average price?

Anchored volume-weighted average price reflects actual price and volume history, giving it what the speaker calls market memory. Institutions follow the benchmark because traders executing large orders are judged by whether their fills outperform it. In the example, a trader has five days to buy 10 million Exxon Mobil shares for a hedge fund client. Better execution relative to the benchmark can lead to future orders, while failure can send those orders to another trader. These incentives help explain why price may react with support or resistance near the level.

Q: How should indicator periods match trading style?

The period should reflect the participant's time horizon. A long-term investor can use a 10-month moving average because its slow movement filters more short-term noise. A short-term swing trader can instead use an eight-day and 21-day moving-average crossover. Both approaches use averages as smoothing mechanisms, not as actual traded price history. Matching the period to the strategy helps reveal the relevant trend without pretending that one setting serves every investor.

Summary & Key Takeaways

• Defining technical analysis correctly: Technical analysis is presented as the study of market behavior, not merely charts, patterns or lines moving across a screen. It analyzes how stocks, interest rates, commodities and currency prices behave, in contrast with studying the goods and services associated with a particular market. Apple illustrates the distinction. Its popular products may explain enthusiasm for the company, but its status as a great stock rests on sustained price appreciation and the money investors made as it trended higher.

• Putting price trends first: Whether someone trades actively or invests over the long term, the central task is understanding trends. The speaker argues that technical analysis becomes more important, not less important, as the time horizon grows. Asset prices are described as trending rather than behaving randomly. Consequently, a stock already moving higher has a much greater likelihood of continuing in that direction than suddenly reversing. Before a major reversal, recurring signs of exhaustion also tend to emerge in stocks and market indexes.

• Choosing stocks already rising: When looking for a stock to buy, the speaker starts with one that is going up. Rising price is called the most bullish action a stock can take because the existing direction gives it a higher probability of continuing upward. This approach does not depend on guessing that a declining or directionless security will turn around. Instead, it treats observed price behavior as evidence and makes trend continuation the initial premise, while remaining alert to exhaustion before the trend deteriorates.

• Using averages to reduce noise: Moving averages are described as smoothing mechanisms rather than sources of independent price information. They reduce the noise in volatile prices and make the presence or absence of a directional trend easier to see. A long-term investor might examine a 10-month moving average, while a short-term swing trader might use an eight-day and 21-day crossover. Repeated crossings among moving averages can indicate that no clear directional trend currently exists.

• Preferring market-based reference levels: If required to choose a conventional moving average, the speaker favors the slow 10-month moving average for longer-term investing. An S&P 500 close above its 10-month exponential moving average suggests it is probably not in a downtrend. The stronger preference, however, is anchored volume-weighted average price because actual transactions and institutional performance measurement give it market memory. Traders executing large orders are judged against this benchmark, helping create support and resistance as price approaches it.