There are various trading strategies, including long-term and short-term trading strategies, that you can use to increase your returns out of your investments. Trend trading strategy is also one of the most followed trading techniques among traders. It is mainly based on understanding the trend and trade according to it. Most traders use this strategy to capture gains by reading the asset’s momentum.
In this article, we are going to discuss the significance of trend trading and different trend trading strategies. So let’s get started.
What is Trend Trading?
In the financial markets, trend trading is one of several popular tactics employed by novice and experienced traders. This trading method is commonly employed on the most popular forex and CFD trading platforms. Trend trading tries to follow an asset’s momentum and profit from any price swings that occur as a result. The technique is predicated on the idea that by studying historical trends and patterns, you can predict the market’s path to a degree.
The method is usually associated with price action trading and is popular among both short-term intraday traders and longer-term investors. You can trade a variety of markets, including FX pairs like EUR/USD and USD/JPY, as well as binary options, commodities, indexes, ETFs, and cryptocurrency assets like Bitcoin.
Trend traders use a variety of trading instruments and software, including trend lines, technical indicators, and trading bots, to execute their trades. Later on, we’ll go through how to trade using moving averages, support and resistance, and other strategies.
Though there are some similarities between other types of trading, trend following should not be mistaken with swing or momentum trading.
Trend Trading Vs. Swing Trading
The timescale of trading is a significant distinction between these two systems. Swing traders trade within the ranges indicated by support and resistance with short-term trades; trend traders trade up or downtrends with deals lasting months.
However, with the availability of numerous time frames in real-time, this is a point of contention today. This means, for example, that you can trade on 1-minute, 5-minute, or 15-minute charts as well as 4-hour charts.
Another distinction is that whereas trend trading focuses on economic news and fundamental market changes, swing trading focuses on short-term price activity.
Trend traders enter when the trend is strong and depart when the trend shifts, regardless of the time range. Swing traders, on the other hand, take a risk by positioning in the opposite direction of support or resistance and exiting when stops or profit objectives are reached.
Trend Trading Vs. Momentum Trading
The critical similarity between trend trading and momentum trading is that both try to harness an asset’s momentum. In general, momentum traders will concentrate on making a few transactions over a period of hours or days, whereas trend traders will consider long-term fundamental valuations.
As a result, momentum traders may concentrate on capturing significant changes resulting from active market participants bidding prices up or down, generating a considerable swing in one direction. On the other side, trend trading is significantly more reactive and unpredictable.
If you’re deciding between momentum, trend, or swing trading, a demo account is an excellent place to start. Experienced traders may choose to use a combination of strategies, though this will take some time to master.
Trend Trading Strategies
With so many ideas and techniques to select from, it’s critical to do your homework and figure out which ones will work best for you. You may also play around with live daily and weekly charts in your demo account, including candlesticks and Heiken Ashi, as well as common indicators like Bollinger bands and moving averages. A few instances are provided below.
Ensure that risk management is in place for any trend trading plan, even if you’re trading the four most prevalent and dependable indicators. For example, in an uptrend, stop losses should be set below a previous swing low or support level, while in a downtrend, stop losses should be positioned just above a prior swing high or resistance level.
Trading With Trend Lines
Trendlines, which connect consecutive higher lows in an uptrend and lower highs in a downtrend, are among the most effective trading tools. To be effective with trendlines, the price must cross the line at least three times.
Traders will then watch for bounces off the trendline to trade, but they can also search for breakouts. When the price breaks above or below a rising or falling trendline, it is called a breakout. They’re frequently followed by a lot of momentum in the breakout’s direction.
Fake or false breakouts are a typical occurrence while trading with trendlines. When the price appears to be breaking out of the line but then reverses, the trader is left with a losing position. These can be difficult to spot for inexperienced traders at first.
Trend Trading With Moving Averages
This strategy is used when a short-term MA crosses above a longer-term MA for a long position and when a short-term MA crosses below a longer-term MA for a short position.
Because this strategy works best when there is already a trend, it is typically used in conjunction with other technical analysis tools and indicators to uncover forex signals. For example, when the price is above a moving average, it typically indicates an uptrend, and when the price is below it, it usually indicates a downturn.
Trend Trading With Relative Strength Index (RSI)
Once an upswing has been recognised, the RSI is a momentum indicator that suggests good entry and exit opportunities. The value of RSI fluctuates between 0 and 100. For an uptrend, the RSI should be over 30, and for a downtrend, it should be below 70.
Rather than signalling when to start and exit trades, this strategy is better utilised for identifying changes in direction and confirming patterns. You may use RSI to base your trades on any significant trends that are present by incorporating them into your strategy.
It’s worth noting that if an asset is in an uptrend and drops below RSI 30 or is in a downtrend and surges beyond 70, it might signal a reversal. As a result, a reversal approach might be beneficial for such possibilities.
Pros of Trend Trading
So, why do traders opt to trade in the forex market by following trends?
- Compared to day trading, transaction costs are lower. Transaction costs are lower when following trends than when using high-frequency tactics like scalping or day trading since you establish fewer positions.
- Trend trading needs less commitment than other types of trading since it moves slower, making it suitable for novices or people who work full-time.
- You have the option to terminate your losses early – The problem of holding on to lost transactions is avoided with trend-following. Many traders do this in the belief that the forex market would rebound, but they are typically missing out on a lucrative chance. Risk management is also important, as it allows you to quit a trade if it goes against you and conserve your money for the next move.
Cons of Trend Trading
There are many drawbacks also of trend trading.
- History does not always repeat itself – While trend trading is based on the premise that history repeats itself, this is a very subjective concept. Unpredictability in the markets can be caused by a variety of factors, which can eventually result in losses.
- Broad learning curve – When comparing trend trading to ‘buy and hold,’ the former generally takes a lot of practice and market understanding. This is because traders must understand how markets work, where to search for economic events, and how to react fast to them.
- False breakouts – Trend followers are always trying to ride the market’s currents. The issue here is market consolidation, which means that a trend will not take up lengthy periods of time. This can lead to false breakouts, making winning trades more difficult.
Automated Trend Trading
Additional tools may be used by specific traders to automate trading activities and reduce the time investment.
For all levels of experience, advanced trading platforms such as MetaTrader 4 (MT4) and MetaTrader 5 (MT5) provide great automated capabilities. Custom indicators, automated trading bots (EAs), scripts, and signals are examples.
A trading bot is a computer programme that searches the markets for you and puts trades when the market circumstances are favourable. You may explore them in a comprehensive marketplace and share trend and trade ideas in a community forum on the MT4 and MT5 platforms.
It’s critical to join up with a broker that has instructional resources and research capabilities inside their platform or app before you begin trend trading. Brokers that provide a complete experience will provide you access to all necessary materials to improve your trading methods. In addition, some account categories may include a mentor or devoted expert as part of the sign-up process.
If you’re a beginner, a trend trading course, a club or academy, a YouTube video tutorial, an e-book, or community comments and reviews on a forum are all good places to start.
We’ve covered the fundamentals of trend trading methods, their benefits and drawbacks, and some helpful hints in this post. Take some time to investigate a reliable brokerage provider and read online evaluations and feedback, whether you’re new to trend trading or an experienced trader.
You can quickly begin your journey of trend trading with the highly regulated broker Investby. It is one of the best brokers for providing many trading tools for technical analysis that involves trend trading.
Ensure you have appropriate risk management guidelines in place, regardless of which technique you adopt. This will enable you to create the best trend trading system possible for your investing objectives. Of course, you may always test trend trading on a demo account if you’re still not sure whether it’s your friend or adversary.