One of the strategies in trading that uses and utilizes a technical analysis in pointing out a trend or its possible direction, analyzing it to forecast and determine the suitable entry and exit points in a trade. Trend trading is mostly used in assets and markets such as stocks, bonds, currencies, commodities, and futures.
In the simplest terms, Trend trading strategy is a method that uses a technical analysis to study and evaluate a trend’s direction and to where it might be headed as the trader places himself in a particular position or a lot of times in a long position most especially if a stock is headed in an upward trend. A short position is also taken when there is a downward trend in the stock of a security or a commodity.
In trend trading, a trader will be following the direction of the trend in creating price patterns to which an upward or downward trend might occur. Historical data are also used in determining a trend or a pattern in the price of the stock.
Although there are a couple of ways to use this strategy, trading through following trends always circles back to following a set of fixed principles that follows elements like the volatility of the market, the equity, and the latest price of the market. While price patterns are taken into consideration in trend trading, this method cannot forecast or predict future prices. Trend trading, like other strategies and methods used by other traders, also requires a set of principles like discipline and emotional detachment from any major decisions. As much as one can be sure with the strength of the strategy and the number of data used in the decision made, markets are very susceptible to sudden drops or jumps so as to say, a strong knowledge, experience and other fundamentals or indicators must also be used to ensure the strength of one’s decision.
Starting a Strategy
Since Trend Trading is mostly used by traders taking long positions due to long-term trends, there are some elements and principles that one must always keep in mind when using trend trading in long-term positions.
Not reading too much on the daily analysis of daily price reactions led by sudden breaking news alerts or releases is a practice that trend traders must keep in mind since there is the fact that the trend might reverse at any given time.
Exiting a trade suddenly and quickly without the decision being backed-up by enough data can always be encountered. Traders must always keep in mind that there cannot be a strategy that would be too perfect to fail despite the number of indicators and tools used.
A way one can learn from trend trading is the hard way as a trader might suffer before even learning from practice over time and experience though one must not fear in directly trading and practice.
One basic way to profit from the strategy is to buy in upcoming higher highs and sell in upcoming downtrends.
A trader will also benefit from being updated with the latest market news and updates and even before when they are set to be announced. This will allow them to anticipate, if not predict, the upcoming trend in the price of a security.
Building the strategy must also be made in accordance with the current trend or condition of the market. Use of indicators can also be helpful in devising a strategy. A growing attention in a particular market can also be used in building your strategy and most importantly to always weigh in the level of risk and a possible reversal in a current trend to avoid causing a huge loss.