Author: Albert Yang
Yang brings more than 16 years of European real estate investment management experience to Harrison Street. He was most recently at Barings Real Estate, where he served as managing director, client portfolio manager responsible for European capital raising, investor relations and client service.
Trends & Trendlines
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A trend is a general movement in a particular direction. A market trend is a tendency for security prices to either move up or move down. Sometimes, they move sideways, but the big profits are usually made in either an uptrend, where successive price bars generally have higher highs and higher lows than previous bars, or a downtrend, where successive price bars have lower highs and lower lows than previous bars. Furthermore, it is obvious that if the market or security is trending, then support and resistance lines, by necessity, will also trend in the same direction. So the first step to increasing trading profits is to recognize the trend.
No doubt, the above scenario is somewhat true, although it is impossible to quantify the effect. But there is another reason why markets trend — because of the interconnections of the economy. As I sit here writing this in March, 2009, the market indexes have dropped by more than half from their peak in October 9, 2007. Since the peak, the market has been trending downward. Why?
First, it became apparent that many subprime mortgages were defaulting. This didn’t hurt most lenders too much at first since they securitized the loans and passed on the credit default risk to the investors of these mortgage-backed securities. The increasing defaults caused credit rating agencies to downgrade mortgage-backed securities, which lessened their value. So many companies who bought bonds of these distressed companies entered into credit default swaps, which promised to pay the bondholders the principal should the bond issuers default. However, many of the CDS issuers, such as AIG, saw it as easy money, figuring they could collect the premiums and never have to pay out on the swaps.
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