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Given that you’ve clicked on this article about trend trading, you’re probably a trader or know enough about the trend, or you just found out that trend trading is one of the well-known and potentially profitable approaches to trading.
You may be a beginner and just heard what trend trading is from a trader friend or read about it in an online forum.
In that case, you may ask questions like “What is trend trading?” and “How does trend trading work?” Also, is trend trading a good trading style, and how can I add trending to my current trading approach?
Is trend trading enough, or do I have to consider other factors, like the possible benefits and drawbacks of trend trading?
This article is a guide on how to profit from various markets. Specifically, you’ll learn how trend trading works and how it can help you make the most of your trading experience.
What Is Trend Trading?
Trend trading is a trading approach that aims to make money by analysing an asset’s momentum in a specific direction.
A trend is when the price moves primarily in one direction (up or down).
When an asset is moving upward, trend traders take a long position. Higher swing lows and higher swing highs are indicators of an uptrend.
When an asset is trending lower, trend traders may choose to open a short position. Lower-swing lows and lower-swing highs define a downtrend.
Understanding Trend Trading
The assumption behind trend trading is that an asset will continue to trend or move in the same direction.
Trend trading techniques sometimes include a take-profit or stop-loss clause to lock in a profit or prevent severe losses if a trend reversal happens.
Long-, intermediate-, and short-term traders can use trend trading.
Does Trend Trading Still Work?
Yes. Trend trading still works in today’s trading world. This type of trading is one of the most well-liked approaches to trading.
Trend trading has been around for decades because it’s a proven approach to making money in the market.
Here are two main reasons trend trading is still a viable option for traders:
- Humans are social creatures: As social creatures, we develop structures to get along and work as a group.
People usually elect leaders (the minority) to lead the group’s other members to maintain order and avoid chaos (the majority).
Chart patterns also use this dynamic. People who buy and sell cause the financial markets to move. This buying and selling operate on people’s ideas, beliefs, and feelings.
The chart patterns traders see are, in a way, maps of human nature.
- Humans tend to follow leaders: Most traders wait for someone to move the market since the masses tend to follow suit. Then and only then will these traders make their positions in the market.
The general public usually does the same when the market’s leaders (professional traders) commit to buying or selling.
This action further drives the market toward these professionals’ trades and establishes a trend.
Many people might not like being followers, but it’s acceptable in trading. A typical retail trader needs more financial muscle to launch a trend.
Generally, large institutions start trends by engaging in massive volume trading, taking positions, and adding to them over time. This move builds momentum and can spark a long-lasting trend.
Following an established trend can be a great way to trade. There’s a good chance that the substantial capital investment in one direction will give the market momentum to move in that route over the long term.
A trend may end at any time, so you want to get on board as soon as possible.
How Do You Find Trend Trading?
Like other trading techniques, trend trading’s success depends on practice and finding the right broker.
Once you’re comfortable with your trading method, you can open a live account and trade over 500 financial instruments with real money.
You can also access competitive trading conditions with tight spreads and low commissions.
Is Trendline Trading Profitable?
Trendline analysis is an excellent way to maximise profits from following trends.
Since the method is straightforward, there are very few grey areas. Trendline strategy analysis also usually depends on solid principles when determining whether something is trading above or below a trendline.
You can also set up trades with average risk-return ratios.
The likelihood of trading in favour of the market rather than against it might be high because so many traders are using the trendline strategy.
How to Define Trends Like a Pro
Define trends using the appropriate charts. For instance, a trend on a five-minute chart might not have anything to do with what’s happening on an hourly or daily chart.
Even experienced traders may find that what they’re following on a daily chart is different from the trend they’re following on a weekly chart. Daily charts are often for swing trading.
Trends Can Exist on Different Timeframes
A market can have various patterns on different time frames depending on what time frame you’re on.
One mistake traders need to correct is trading trends in every time frame. Instead, it’s best to trade trends in your selected time frame.
So, if you’re trading daily, trade trends in the daily time frame. But if you’re trading every five minutes, trade trends within the five minutes.
Short-Term Trend Trading
Short-term traders, like day traders, like to keep an eye on trends that develop throughout the day in short periods to try and profit from short price swings.
Scalping is one of several well-liked intraday trading techniques. However, you can also use distinct intraday trend-tracking strategies.
Intraday Trend Trading
Typically, intraday trend traders would hold positions through the day’s end.
Day traders can examine patterns that are only present for a short period during the day, even for a few minutes or hours.
Intraday trend tracking includes the analysis of shorter-term price variations and movements.
Since intraday trend following involves a short-selling strategy, which short-term traders frequently use, this technique can be helpful when following a downtrend.
Long-Term Trend Trading
Holding a position for extended periods—often in an uptrend—is an important part of long-term trend trading. This action can take a few days, weeks, months, or even years.
Long-term traders base their decisions on in-depth fundamental analysis, mainly concentrating on the market’s future.
Long-term traders also focus more on the longer-term trend and its influencing factors than on daily trend fluctuations regarding trend analysis.
Position Trading
Position trading is one of long-term investors’ most well-liked trading methods. Trend traders can use this strategy to buy and hold a position for a long time.
Trend following is essential and plays a significant role in achieving long-term gains if short-term fluctuations could affect a position’s long-term outlook.
It’s typical for position traders to concentrate more on fundamental analysis to assess possible price trends in the market.
3 Types of Trends Every Serious Trader Should Know: When Is the Best Time Follow or Enter a Trend
Many traders believe that trends are higher highs and lows. Only some trends are created equal, so more is needed.
Some trends are better suited for breakout trading than for pullback trading.
Here are three types of trend analysis you must know:
Strong Trend
There is little selling pressure in this trend, so buyers are in charge. This trend will likely experience brief pullbacks that barely exceed 20 MA (moving average).
In some cases, you won’t feel any pressure to sell as the trend accelerates.
Healthy Trend
With selling pressure in this type of trend, the buyers remain in charge because of traders taking profits or looking to take counter-trend setups.
It’s common for this kind of trend to have a substantial pullback near the 50 MA, which presents an opportunity to ride along with the trend.
Weak Trend
In this trend, buyers and sellers are vying for control, with the buyers having a minimal advantage. You can expect the market to have sharp declines and trade beyond the 50 MA.
Trend Trading Strategies and Trend Indicators
Moving Averages
Trend trading techniques involve taking a long position when a short-term moving average (MA) exceeds a longer-term moving average.
Meanwhile, this technique takes a short position when a short-term MA crosses below a longer-term MA.
MA techniques pair with another technical analysis to weed out the signals.
Since moving averages give weak signals when there’s no trend, the price simply whipsaws across the moving average. Identifying the trend may involve observing price activity.
A price above a moving average can suggest the possibility of an upswing. At the same time, a downtrend may happen when the price is below the moving average.
Moving Average Convergence Divergence
The MACD, or moving average convergence divergence, is an oscillating indicator.
Technical analysis indicators that change over time inside a band are known as oscillating indicators.
MACD works as a momentum and trend-following indicator. For example, looking at which side of zero the MACD lines are in the histogram underneath the chart is a basic MACD strategy.
Two lines make up a MACD: short and slow lines.
A buy signal occurs when the short line crosses over or through the slow line. Meanwhile, a sell signal happens when the fast line crosses and drops below the slow line.
Moving Average Crossover Trend Trading Strategy
This strategy is good for beginners because it’s simple and can give accurate signals. This technique uses the most popular technical indicator–the MA.
Remember that MAs are lagging indicators, reflecting the historical price movements rather than magically predicting the future.
For this strategy, you may use three Simple Moving Averages (SMAs) with periods 9, 21, and 50. You can also use another configuration with similar proportions, like 10, 20, and 50.
This approach is effective in any market and over any time frame. Both swing traders and day traders can use it.
Momentum Indicators
There are different momentum indicators and techniques.
An illustration of trend trading would be to look for an uptrend and then use the relative strength index (RSI) to show entry and exit points.
For example, a trader might wait for the RSI to fall below 30 before rising above it. If the general uptrend persists, this might suggest an extended position.
Relative Strength Index (RSI)
Another fluctuating indicator is the relative strength index (RSI). Its movement range is zero to one hundred. Therefore, it offers different data than the MACD.
When the indicator in the chart is above 70, the RSI may consider the price to be “overbought” and due for a correction.
On the other hand, if the indicator is below 30, the price may be “oversold” and due for a bounce.
Ascending and Descending Triangles
Some excellent trading systems rely on chart patterns in addition to technical indicators.
Though not symmetrical, triangles are the most straightforward and influential trend continuation patterns.
After a brief period of tension between bulls and bears, the ascending and descending triangles mean the current trend will continue in the same direction.
The price develops a flat upper resistance line when the ascending triangle forms. Meanwhile, a descending top line and a flat bottom line combine to form the descending triangle.
The flat resistance line, reflected by the ascending triangle, suggests significant resistance to the uptrend.
Impatient traders enter trades too early. Waiting for a confirmed breakout may offer a more reliable trading strategy.
Average Directional Index Trend Indicator
Traders use the average directional indicator (ADX) to determine a trend’s direction and strength.
The directional movement index (DMI), which consists of two additional lines, the negative directional indicator (-DI) and the positive directional indicator (+DI), is frequently drawn in the same window as the ADX.
The other two lines determine the trend’s direction, while the ADX line indicates the trend’s intensity.
On-Balance Volume (OBV)
The on-balance volume (OBV) is a single-line indicator that compiles a significant amount of volume information into a single line.
The indicator measures the increasing “buying and selling” pressure by adding the volume on up days and subtracting the volume on down days.
Ideally, the volume should confirm trends. A rising OBV should follow a rising price. On the other hand, a falling OBV should lead to a falling price.
Bollinger Band (C) Strategy
You can also use John Bollinger’s technical indicator. The Bollinger Band indicator (BB) has been around for almost 40 years.
You can apply this indicator to determine the strength of a trend, time trades during range markets, and look for prospective market peaks.
Some traders would instead buy when the price varies over the BB’s mid-band and sell when the currency pair continues to move below it.
Day Trading Strategies
Day traders who seek to profit from lower time frames (1-minute, 5-minute, and 30-minute charts) sometimes use trend-following strategies.
When trading this way, traders look for markets expected to trend throughout the day while taking advantage of the cycles that commonly develop in lower time frames.
Moving averages are a standard indicator for discovering these circumstances.
By examining a market’s average price over different periods, this kind of indicator lets traders determine the best trend in the market quickly.
Traders frequently examine price cycles in addition to technical indicators, which give a quick visual cue on the potential for a trend.
The price usually displays a pattern of higher high and higher low cycle formations in up-trending markets.
Meanwhile, the price shows a pattern of lower low and lower high cycle formations in downward trending markets.
Higher Time Frame Trend Trading
Many traders will look towards the stock market when using trend strategies on higher time frames.
A successful publicly traded company will attract more people to own its stock, creating the potential for a long-term trend following the chart.
Trading Trend Reversals
A trend reversal happens when a price trend moves from an upward to a downward direction, or vice-versa.
Traders can profit from this scenario by attempting to get out of positions before the shift happens or as early as possible if the movement has already begun.
Counter-Trend Trading Strategy
Counter-trend trading is a technique traders use to predict a trend reversal and trade against the current trend.
Typically a medium-term strategy, counter-trend trading is a swing trading method that involves envisaging a potential reversal, or a “swing”, in the trend.
How Do You Do Counter-Trend Trading?
Trading against the present trend pattern is known as counter-trend trading because it lets traders predict a trend reversal.
Swing trading techniques, like counter-trend trading, include predicting a future trend reversal or swing.
Trendlines and Chart Patterns
A trendline is a line drawn at an uptrend or downtrend’s swing lows or swing highs. This line suggests a potential place where the price could drop in the future.
Trend traders also keep an eye out for chart patterns that suggest the probable movement of a trend, like flags or triangles.
Trend Trading Chart Example
Here’s a list of standard trend trading charts you might encounter:
- Double top
- Double bottom
- Ascending triangle
- Descending triangle
- Wedges
- Symmetrical triangle
The Benefits of Trend Trading Strategy
One of the most straightforward chart patterns to notice is a trend. A chart makes it obvious if the market is moving upward or downward.
A trending market is typically clearer than other chart patterns.
Trend trading is also easy to understand for many newbie traders. Once you have entered the trade, there’s little you can do if you’ve correctly spotted a long-lasting trend.
If you plan to trade trends, learn to hang tight and take things easy because trends are long-term movements.
Trend Trading Improves Your Win Rate
Trend trading can increase your odds of success because it trains you to interpret and adjust to market volatility.
The markets fluctuate between periods of orderly behaviour (providing trade opportunities with high likelihood) and disorderly (not providing high-probability trade opportunities).
Recognising and understanding this cycle or trend is important for trading success. These actions allow you to trade only during orderly cycles and avoid the market during chaotic cycles.
Offers a Better Risk to Reward Ratio
One of the most noteworthy benefits of trading in the trend’s direction is that you can win trades more if you execute the technique correctly.
The word trend means “to extend in a general direction,” making it clear that trends refer to long-term movements.
Trading market trends allows you to profit from the market’s long-term movements and generate significant returns.
Trend Trading Can Apply Across Any Markets
Trend trading applies to various markets because it concerns long-term market movements.
How to Develop a Trend Trading Strategy
Create a trend trading game plan that suits your overall trading style.
Without proper risk management and self-control, even the best trading strategy will not make you money in the long run.
Markets Traded
Reputable brokers like Taurex offer you competitive trading opportunities in various instruments, including Forex (FX), indices, metals, commodities, cryptocurrencies, and shares.
They also give advanced and user-friendly trading platforms like MetaTrader 4 (MT4), MetaTrader5 (MT5), and Taurex App to help you get the trading outcome you deserve.
Trend Trading Strategy Template
Here’s what a trend trading strategy may look like in live trading:
- Wait for a pullback toward the 50 MA if the market is in a solid trend (on the daily time frame). You also need to wait for a candle to close in your favour if the market begins to retrace toward the 50 MA.
- If the candle burns out in your favour, try to enter the next candle. Set your stop loss position from entry if you enter on the next candle.
- If a stop loss is set, look for a takeaway at the closest swing, high or low.
How to Start Trend Trading
Here’s how you can start your journey of trading trends:
Identify the Trend
The first step is to use a chart to find a trend over time. This step will show you whether the market has momentum.
Some claim that trends can start suddenly and end abruptly.
Others argue that a trader can, at the very least, make an educated guess using technical analysis.
Trend lines are the most widely used indicators of market direction. Chartists create patterns on price points to define trends on charts.
The trend line will have an upward slope when the market is moving up or in an uptrend. This scenario happens when two low points in a chart combine.
The second low is typically higher than the first low. Investors will consider trading on the bullish (the long side of the market) until the uptrend ends.
Choose a Market to Trade
It’s essential to have a plan before starting a position so that you can decide what to trade.
Some trend traders prefer to concentrate on a single market. Others may diversify their prospects by distributing their holdings across many markets, increasing their exposure to a broader range of trends.
Once you’ve chosen what to trade, you must monitor any changes that can spur new trends or lead to counter-trends.
These changes can include political developments, central bank policy pronouncements, and breaking news.
Watch for a Pullback
The next step is determining the best time and price to enter the market after determining the trend. This usually happens during a pullback.
A pullback is when a market moves in one direction but suddenly reverses its course. For instance, if the price of an asset declines while the trend was previously bullish or upward.
Implement a Risk Management Strategy
Most trend traders will use stops and limits to secure their deals. Limit close orders allow traders to lock in a profit by closing a position at a better market price.
However, stop-losses will close a position out if the market goes in the opposite direction by a specific amount.
A risk management plan must be in place because trend reversals can happen at any time.
Find the End of a Trend
Identifying the end of a trend and its beginning can be equally challenging.
A reversal is the most obvious sign that a trend is ending. This event occurs when the price steadily moves in the opposite direction.
Usually, reversals happen at a point of support or resistance, which we’ll discuss in the following section.
How to Set Stop Loss in a Trending Market
Moving Average
Instead of using shorter-term prices, stop-losses are set to be just below a longer-term moving average price.
Structure
A downtrend has lower highs (and lows), while an upswing has higher highs (and lows). Here are some options:
- Uptrend: Your stop loss can be set below the previous low.
- Downtrend: Your stop loss can be raised above the previous high.
Trendline
Here’s how to use trendlines in two steps:
- Connect the lows of an upswing to draw trendlines and the highs of a downtrend.
- Once you’ve established the barrier, you can place a stop loss below the trendline (for uptrends) or above the trendline (for downtrends).
Trend Trading
Here’s why trading is worth your investment:
- You can trade with a forward-looking and reputable company approved and regulated by a regulatory agency.
- You can access the world’s most popular trading platforms, such as MT4 and MT5.
- We can provide you with learning resources, up-to-date news analysis, trading advice, and recommendations.
Key Takeaways
- Trend trading seeks to maximise profits by analysing an asset’s movement in a specific direction.
- No single technical signal can guarantee market success. However, specific methods are valuable tools for trend traders.
- Trend trading intends to capitalise on uptrends when prices tend to reach new highs or downtrends in which prices tend to hit new lows.
Frequently Asked Questions
- What’s an example of a trend following?
When an asset’s price action indicates a downward trend, or when the price is falling in value, traders will look to go short and take a sell position because the trend is making lower lows and lower highs.
- What are examples of trend-following indicators?
A Moving Average Convergence Divergence (MACD) and a Relative Strength Index (RSI) are two examples of trend-following indicators that trend traders use.
- I’m confused when you say trend trading increases win rate–wouldn’t trend trading decrease your win rate because markets tend not to trend most of the time?
Trend trading can boost the win rate because you’re trading along the line with the least resistance instead of someone trading against the trend.
- If the price is below the 200 moving average in the lower time frame but above the 200 moving average in the higher time frame, should we treat this market as an uptrend or a downtrend?
The trend of the timeframe you’re trading on is something you should always note:
- If you’re trading on the 5-minute time frame and it’s in a downtrend, it’s in a downtrend.
- If you trade using the daily period, you should know the daily timeframe trend.
It doesn’t matter if the time frames are too far apart because it’s illogical to trade on the 5-minute time frame while following the trend on the daily timeframe.
- How can I know if it will be a pullback or a reversal?
The range of the candles is relatively narrow during a pullback.
On the other hand, during a reversal, the candlestick range widens, and the price usually breaks important market structures, like previous swing lows or areas of support.
Like other trading strategies, trend trading gives traders potential rewards and risks. The key is to work with a registered broker who can provide you with security and a competitive edge in the financial market.
