What is Trend Trading?

The technique is based on joining the trend and then quitting it before reaching a stoppage. However, because of the trend’s dynamic character, traders have difficulty predicting where it will go and how long it will stay at a particular position. As a result, it is critical to have insight, prudence, and flexibility when riding the trend.

Key Takeaways

  • Trend trading entails using technical analysis to determine the right market momentum for profitable investments.Trend traders do not rely solely on future forecasts or other financial research reports; instead, they join the present trend and leave when it is set to reverse.Staying cautious and deciding on a prompt timeframe to ride the trend and entry and exit points will make the trend-following strategy effective.The leading trend trading indicators include the moving average, relative strength index (RSI), and average directional index (ADX).

How Does Trend Trading Work?

Trend trading is based on the concept that the price of an asset moves in a specific direction but not in a straight path with a degree of predictability for a particular period. Based on the identified trend, traders can devise short-, mid-, or long-term strategies. They use technical indicatorsTechnical IndicatorsTechnical indicators refer to technical analysis tools used by investors to make investment decisions based on future price movements derived primarily from historical prices. read more with market data as input to determine whether an uptrend or a downtrend is happening.

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Even if there are swings, an uptrend means prices are moving up, while downtrends indicate the prices are sinking. Usually, uptrends are manifested by a series of high “swing highs” and high “swing lows” moving up, making a climbing trajectory. Conversely, downtrends usually contain low “swing highs” and low “swing lows,” making a path that is heading downward. In both cases smoothing out the deviations indicates a clear uptrend and downtrend scenario, respectively.

Trend Trading Strategies

There are various levels of strategies ranging from short-term to Long-term trend trading. It’s a combination of data and technology that will identify trends and help with risk management. Identifying trends correctly is at the heart of any strategy. For instance, It is vital to consider the amplitude of swings when deciding on trading entry and exit positions.

Trend traders use several indicators to get trend signals and benefit from different methodologies. For instance, day traders benefit from short-term price movements, whereas position tradersPosition TradersPosition trading is a strategy in which a trading position is held for a long period in order to achieve a profit goal. In position trading, a trader will typically think long-term, and the position will be held for a long time, regardless of short-term fluctuations.read more benefit from holding on to a position for an extended period. The long positionLong PositionLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels.read more approach depends on price movement achieving higher peaks and a short positionShort PositionA short position is a practice where the investors sell stocks that they don’t own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date.read more if price action indicates lower lows. They would quit the transaction if analytics suggested that a reversal was likely.

Advanced traders use leverages while they adopt trend-following strategies. Investors borrow the required amount to increase the trading value beyond what they currently have and play with tight-stop or profit-taking techniques to earn effectively. Such methods are vital to traders to ensure that they won’t lose money if there’s a quick trade reversal.

Trend Trading Indicators

Technical Traders need reliable indicators to identify trade signalsTrade SignalsA trade signal is an analytical tool that provides a trader the cue to make buy or sell orders to maximize profits. Various forms of trade signals exist, with differing goals and potential profits. Traders have been using technical indicators to reduce their risk in trading for a long time.read more and create strategies. Most traders use more than one indicator to achieve a higher level of accuracy.

#1 – Moving Average

The moving averageMoving AverageMoving Average (MA), commonly used in capital markets, can be defined as a succession of mean that is derived from a successive period of numbers or values and the same would be calculated continually as the new data is available. This can be lagging or trend-following indicator as this would be based on previous numbers.read more is one of the fundamental indicators used in trend analysis. It determines the average price of an asset during a specific timeframe by examining the recent prices and smoothing out the fluctuations. Most popular options include 50, 100, and 200-day moving averages. The moving average does not predict prices. It moves much slower than the actual market, but it can be helpful for traders as they will confirm whether an asset is moving up in price. Prices above the moving average mean that the overall trend is up.

#2 – Relative Strength Index (RSI)

RSI represents an asset’s momentum in the market and helps identify when an asset is either overbought or oversold. Hence it guides investors in deciding on exit and entry points. The relative strength value moves between 0 and 100. If the line is over 70, the asset is overbought. If it’s below 30, it’s oversold or undervalued, which may be the perfect time to buy it.

#3 – Average Directional Index (ADX)

ADX analyzes the intensity of a trend. ADX line moves between 0 to 100. If a trend is strong, then the ADX value lies between 25 to 100, and a value below 25 means the movement is weak.

Example

Let’s look into Nike stock price movement for a timeframe from September 2020 to February 2021 to understand trend trading in stocks.

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The price moves upward during the specified period even if it swings highs and swings lowes. There’s a clear uptrend in these six months. First, there’s a small impulse from August to late September. Then, a much stronger one from November to the middle of January. Various indicators provide more accurate information, whether a strong trend or situation encompasses overbought or oversold scenarios.

Trend Trading in Forex

Trend trending strategy in Forex is a common phenomenon. While trading in Forex, traders mainly use technical analysisTechnical AnalysisTechnical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data.read more to identify the direction of price movement, which may last days, weeks, months, etc. Technical traders use forex trendline trading strategies to analyze important features like trend patterns or support and resistance levels. We can say that if a forex pair exhibits a downward trend, it is appropriate to sell, and it is a buy case if the forex pair shows an upward trend. However, this market has its specificities, too. Analyzing the geopolitical and economic trends of the countries involved is an excellent way to make better investments

This has been a Guide to what is Trend Trading & its Definition. Here we discuss trend trading strategies and Indicators along with examples and how it work? You may learn more about financing from the following articles –

Yes, many traders use the trend-following strategy. Identifying a trend at its starting phase, optimal buying point, riding it, finding optimal selling point, and prompt liquidation of the position helps make a profit or reduce the loss of money.

Trend following is a strategy that involves traders analyzing and locating a trend and its momentum- followed by riding on the trend extracting the profit with prompt entry and exit decisions. Generally, when an asset demonstrates an upward trend, traders often look to enter into an extended position and buy. However, in the opposite scenario, traders would go short and sell when the trend direction is downward.

Trend traders are concerned with an uptrend or downtrend scenario, whereas swing traders are into range-bound markets, with trading actions based on support and resistance levels. Furthermore, swing traders focus on short-term price changes than trend followers, who also have a long-term outlook.

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