Trend trading is a strategy that focuses on the price movements and trend directions in which the market is moving. It is a highly profitable trading strategy that can help you make money in the short term. Traders need to use the right indicators and trend trading strategies to earn higher profits.
What Is Trend Trading?
It is a strategy that involves the use of various technical indicators. They help a trader to identify the current trend, direction, or momentum of the market. Trend traders need to predict a particular direction the market is moving.
Based on their prediction, they enter a long or short position in the market. With the use of technical analysis, they need to target a price for the particular trading asset. It is usually helpful in mid or long positions of a trading asset.
Traders hold their positions till the trend lasts in the market. And because of this, it can also be said as position trading or swing trading. These traders take advantage of the short or long-term trend of the market to book higher profits.
How To Identify a Trend?
Some trend trading strategies are designed to assist you in identifying trends in the financial market. It helps you to make a perfect entry and exit from the market. Trend followers study the opening and closing price of a particular asset to recognize the market trend.
Primarily, there are three major types of trends in the market that are:
When the market price of a trading asset is increasing, then it is known as an uptrend. Trend traders use a long position to book profits in this type of situation. At this time, the market tries to break all the previous high levels and form new ones.
For example, the price of a stock rises by 50 points and then falls by 20 points, again rises by 100 points and falls by 40 points. Then it is called an uptrend. The market is making higher highs and lower lows, Therefore, it is a profitable situation.
When the market price is making higher lows and lower highs, it is known as a downtrend. Trend traders use short positions to earn money in this trend of the market. Therefore, profits can be generated even with decreasing prices.
For example, the price of a stock decreases by 100 points and increases by 60 points, then plunges by 120 points and increases by 40 points. Therefore, it is an indicator of the downtrend in the market, and you should short your positions to earn profits.
Sometimes the market does not move high or low. That situation is known as the sideways trend of the market. Professional trend traders take advantage of this situation and not every trader. The positions in this situation are held for a concise time, and quick profits are made.
Scalpers and range traders identify this price movement, and they make quick profits from the trades in the market.
Three Indicators for Trend Traders
There are a variety of indicators for technical analysis and identifying the trend of the market. It involves studying price action and price charts with the help of various tools to find new opportunities in the market.
Traders should use the indicators according to their studies because they are not 100% accurate. Also, manage your risk while you are trading in the open market not to lose your money. The top three indicators for trend trading are:
Moving Average Trend Indicator
The meaning of this indicator is clear in the name itself. Moving average uses the average price of the trading asset over a given timeframe. By doing so, it calculates whether the price is moving upward or downward.
This indicator forms an average line and a signal line that help a trader to identify when to enter or exit the market. Whenever the moving average line crosses the signal line, it shows a change in the market trend. Traders can choose the moving averages according to their choice. Some of them are popular such as 50 days and 20 days on average.
Different time frames are available according to the choice of an individual. MA does not predict the future price of an asset. It only tells the market trend. The price above the moving average indicates an upward trend, and below it indicates a downward trend.
Relative Strength Index (RSI) Trend Indicator
RSI or relative strength index is used to recognize price momentum. It also tells the overbought and oversold signals in the market. These signals are generated by calculating an average over a specific period. Usually, the time taken is 14 days to identify the trend of the market.
This indicator is based on a percentage, if the indicator is above 70, then the market is overbought, and if it is below 30, then the market is oversold. Thus, RSI only tells the immediate signals and does not tells if the market remains overbought for a longer period.
Trend traders open a long position during the time of the overbought signal. On the other hand, a short position at the time of oversold situation to earn higher profits from the market. Hence, it is a reliable technical indicator.
Average Directional Index (ADX) Trend Indicator
Traders may use an average directional index (ADX) to determine the strength of the index. You will get a signal whether it is an uptrend or a downtrend. The value of this indicator can fluctuate from 0 to 100. Above 25 it indicates a strong trend, and below 25 is known as a weak trend of the market.
It used two types of lines to indicate the directional movement index (DMI) apart from the ADX line. One is the negative directional indicator (-DI) or the negative line, and another is the positive directional indicator (+DI) or the positive line.
The ADX line determines the trend’s strength, and the other two lines determine the direction of the trend. Analyze the market trend and an opportunity to enter the market to fetch the highest profit from the market.
Profitable Trend Trading Strategies
There is a wide range of trend trading strategies, and traders are always confused about the most profitable ones. So we have shortlisted some of the most profitable trend trading strategies to make higher profits in the market. The strategies are:
Swing Trading Strategy
The term ‘swing’ means momentum, and ‘swing trading’ means trading in the market’s momentum. Trend traders take advantage of both kinds of momentum, whether it is a positive one or a negative one. It is a type of technical approach in which price charts are studied for opportunities.
Reversal of the trend of a trading asset is known as swing. Traders need to recognise the period of swing to make the highest profits. For example, a trader notices that a stock has reversed its trend and started moving upward. Then he maintains his position till the stock starts decreasing again.
Position Trading Strategy
Position trading is also a profitable trend trading strategy. We all know that the market moves upwards in the longer run. In this trading strategy, a trader holds a position for a long duration. It can range from a few months to years.
He has to ignore the minor price fluctuation to enjoy higher profits in the longer run. Study the historic patterns of the market and, after a deep technical analysis, enter the market to fetch profits. There is less stress when you trade by using this type of strategy. However, it is subject to an exception; market crash, but it also does not last for a longer period.
Day Trading Strategy
The most active traders in the market are known as day traders. Intraday or day trading is the strategy used by them for trading. They are involved in full trading time, and it is their primary work or source of income. These traders hold multiple positions according to the trend of the market.
There is no overnight risk in this trading strategy. Take advantage of the volatility of the market to earn higher profits. Traders need to react to the quick changes of the market so that higher profits can be fetched. Study the market with the current price and make an entry if you see any profits.
Scalping Trading Strategy
Scalping is a concise term trading strategy in which small price movements are targeted. Scalpers aim to earn big by accumulating small profits from each trade they enter in a day. To use this trading strategy, you need proper discipline in trading to exit and enter the right position.
Scalpers also use trading bots to enter and exit the market quickly. The positions are changed even before the change in the market. This is the reason why there are higher profits. They need to study carefully to find trading opportunities from the market.
News Trading Strategy
The news trading strategy focuses on the shifting price trend of an asset because of the market news. Therefore, traders should keep an eye on the latest market news as it can be very helpful to them in grabbing opportunities. In addition, many traders commonly use market news to find new opportunities.
You have to analyze the news and its impact on the market, whether positive or negative, to gain the maximum benefits from the price action. The price chart of the asset can help time the entry and exit from the market.
Before You Trade Trend Trading Strategies
Here are some tips before you start trading by following the trend of the market. The tips are as follows:
- Open a trading account with the leading online broker to gain the maximum benefit.
- Choose a market in which you want to perform trend trading.
- Use a risk management strategy so that you can minimise the risk and do not lose.
- Study the market in-depth and then make a trade to earn returns.
- Use various technical indicators because they are not accurate and do not confuse.
The Bottom Line
Trend trading is a profitable trading strategy, but it involves an in-depth study of the market. Traders also need to use technical indicators in trend trading strategies. However, great results can be achieved with tern trading, choosing the best strategy to generate higher income from the market. Also, keep in mind to select a reliable and trustable broker like PrimeFin, InvestBy, etc. to maximize your trading profits. Finally, follow the trend of the market and earn good returns on your investments.