With learning trend trading you will be able to recognize and ride trends all the way until they fizzle out leaving you with profits that have amassed themselves into big trading gains.
Trend trading is a relatively longer-term trading style compared to other ones such as day trading and swing trading.
The time frame for holding positions can last anywhere from a month (or so) to even years – if the trend keeps on moving in a favorable direction.
Trend trading does not require all that much time to manage the trading position and is another great way to start trading the financial markets especially for busy people.
Legendary trader Richard Dennis used his own trend trading system to make millions trading the financial and commodities markets.
Strategy For Trend Trading
The strategy for trend trading is to identify an emerging trend or one that has been in existence for sometime that will hopefully turn into a much longer-term dominant trend (see below for how to identify a trend). Trends may start to emerge as early as a couple of weeks (or a month) and then possibly continue for a much longer period of time.
After identifying a potential trend, trend trading is more about managing the trade using risk management rules and locking in profits along the way of a favorable moving trend rather than setting defined profit targets or tight stop loss limits and possibly getting out of a trade too soon. Trend trading helps to catch larger price moves (resulting in accumulating bigger profits) until the trend starts to exhibit some form of major breakage or trend violations where it could possibly start to reverse its course.
Just like a surfer doesn’t necessarily know when the wave in the ocean will exhaust itself while riding it, a trend trader will do just the same and keep on riding the trend to its fullest potential while managing the trade along the way.
Types Of Trends
Uptrends – when an uptrend starts to establish itself, the trend starts to reveal the strong backing and conviction among traders and investors carrying the overall trend to higher price levels. Buyers are stronger than sellers, and the trend may continue in the same overall upward direction over an extended period of time, even though there may be some temporarily pullbacks from time to time.
Downtrends – it’s just the opposite of an uptrend. The trend will be moving in a downward direction indicating that there is weak backing and a lack of conviction among traders and investors carrying the overall trend to lower price levels. Sellers are stronger than buyers, and the trend may continue in the same overall downward direction over an extended period of time, even though there may be some short lived rallies from time to time.
How To Identify A Trend
In a classical sense, the makings of a trend can be identified on a chart by the behavior of the price action moving in the same overall general direction that can be defined as follows:
Uptrends – prices will be making new higher-highs and new higher-lows thus creating an overall upward moving trend
Downtrends – prices will be making new lower-lows and new lower-highs thus creating an overall downward moving trend
As trends are starting to form, you can monitor and analyze them by using methods of technical analysis such as drawing trend lines on a price chart to gauge the slope, depth and direction of the trend. This can be done by drawing the trend line across the high points and low points of a gyrating trend.
You can also use several moving averages together (like the 50 day and 200 day moving averages for longer trading time frames. Or use shorter day moving averages for shorter trading time frames) to assess the direction of a trend. You can even use Bollinger Bands to gauge the depth and the direction of the overall trend as well.
Trends can be nice and steady exhibiting little price volatility or they can have bigger price volatility producing larger gyrating swings within the trend.
Trend Trading Tips
- Recognize the direction of an emerging or dominant trend
- Use different time frames on charts to get a sense of the overall direction of the trend
- Assess the point of entry (or multiple points of entries if position building)
- Manage trading risk
- Don’t take profits too quickly (let trends run to earn bigger profits)
- Understand how trends can be influenced by market cycles and seasonality
How Do You Know When A Trend Might End?
Uptrends – when the trend stops making new higher-highs and the pullbacks are starting to pierce down through the new higher-lows
Downtrends – when the trend stops making new lower-lows and the rallies are starting to pierce up through the new lower-highs
Furthermore, when a trend becomes more parabolic in nature with greater volatility flowing into the rising (or falling) steepness of the trend this would be good cause to exercise caution that a trend may be nearing its end.
Also, by using certain indicators of technical analysis they can give you warning signals that a trend may be in jeopardy such as when prices are crossing over trailing moving averages or when prices are breaking outside of Bollinger Bands.
In any event, risk management becomes even more paramount in protecting profits and preserving trading capital just in case the trend starts to break down.
Profit Opportunities With Trend Trading
With trend trading (as with other trading styles) you have the flexibility to trade both sides of the markets (whether it’s going “long” or going “short”) giving you multiple trading opportunities to make some big profits.
Just remember the old saying – the trend is your friend… until the end!
