Companies or individuals investing in the market always study the market first before putting in their hard-earned money. They research and analyse the market thoroughly as it gives them ideas about the trade, market fluctuations, and forecasts. In all this process, one significant part is trend trading. It is a trading strategy that helps traders know the market direction.
The market trading strategy uses several indicators and signals for identifying the market momentum. But, what exactly is the trend?
The trend is the direction of the price of the instrument traded; it could be upwards or downwards, or sideways. A trader identifies the direction and predicts the price movements to enter and exit the trade. This advances the investment of the trader and makes them analyse the trade.
With the article, readers will get an overview of the trend marketing strategy and how it works to assist and guide traders in investing their funds.
Trend trading is a strategy that is preferred by novice and professional traders due to its simplicity and easy use. It helps traders study the market movements of the price of an asset with market prediction. The market analysis and research give the investors an idea of the market and its direction.
There are many factors of the market that guide the trader to predict the market changes. These include the history of the trends, past trade performance, technical and fundamental elements, price movements, and many more.
It is a useful trade strategy because of high market gains, traders analyse the market, know the market momentum of the certain direction, and when the price moves either upward or downward, a trend is formed of the instrument.
When the trend shows an upward movement of the price of the instrument, the trader goes for a long-term market position and enjoys good market benefits. In contrast, when the trend represents a downward movement of the asset price, then the trader makes a small investment to earn quickly from the change.
Moreover, the trader has to consider the timeframe of the trend in the market. The strategy is mostly used by investors who use the position and the swing trading style of investment. In position trading, traders use it for the period of time the trend lasts, whereas the swing traders use it to analyse the trend, and it lasts for the time period the trend lasts. The position traders ignore the market fluctuations and trade long.
Identifying the Trend
Traders use various trend trading strategies to identify the market trends; they enter and exit the market based on the trends. When the trend is going to reverse or end, traders exit the trade. A trader can know the market movements with the strategies such as the moving average, oscillators, relative price index, day trading, etc.
In addition, the instruments’ opening and closing price with the trend range helps the investors to get ample information to analyse the market trends and their flow in the market.
The trends are usually categorised into three types; upwards, downwards, and sideways. A trader can easily identify the trends with their market knowledge and understanding. This requires practice and good trade skills for quick market judgments.
When the market worth of a trading instrument is increasing, it is called an upward trend or uptrend. In such conditions, the trader opts for a long market position to get market advantages as the price may reach high market levels. For example, a currency pair has been showing a market trend, where the prices moved initially at $120, then narrowed to $80, and then made a jump to $150.
So, traders would term it as an uptrend due to the higher highs and higher lows of the asset price.
Similarly, when the market price of the traded instrument is decreasing, it is called a downward trend or downtrend. In such a situation, traders would prefer a short-term market position. The asset price will fall lower low and higher lows; for example, traders invest in a stock with a value of $100, which later increases to $200 and falls to $50.
The sideways trend is totally different from the above two, where the price of the assets neither reaches the higher nor lower price. The traders will avoid such sideways trends and won’t prefer investing. However, the traders of scalping and swing or day trading will invest in such a trade to make a profit from small market fluctuations. Traders can speculate or invest in such market conditions.
Benefits of Trend Trading Strategy
A trader can have several advantages from investing in trend trading; below; we have listed benefits of trend trading to give a quick sneak peek of the strategy:
- Improves market investments
- Provides ample opportunities
- Increases the win rate or profits
- Better risk reward ratio
- Valid for all the markets
- Easy to use
- Several other indicators to assist trade
- Analysis of market
- Gives an idea of the market price of the assets
- Market trading for different timeframes
- Real time trade
- Predicts market movements
With advantages, traders may also face disadvantages in the trade because of the following reasons:
- Market is volatile
- Reversibility danger
- Practice is required
- Quick decisions
Trend Trading Strategies
Investors have to understand the different trend trading strategies for market analysis. Below we have discussed some of the major strategies of the market for guiding traders. Let’s study the strategies and their use in the market:
The trend trading strategy has several indicators for market analysis, and moving averages is the popular strategy to define market prices. Moving averages give traders the average price of the traded instrument within a given timeframe. This helps the trader smoothly identify the market trend with the single line forming on the chart.
An individual or company investor can select their time frames as per the market requirement and then analyse the trend. It could be for 10 days, 100 days, or 250 days as per the need of the trader.
The moving average signal of the market is the lagging indicator and is slow in comparison to the market price. Therefore, moving averages are not suitable for market predictions. These aid traders in knowing the previous market changes and based on which traders make their market move.
On the chart, a single line is formed called MA, moving average, which helps to decide the market trend. If the price is over the moving average, then traders can call it an uptrend, and if the opposite happens, then a downtrend.
Relative Strength Index (RSI)
The relative strength index is a direct indicator that is used for the study of the oversold and overbought market positions. The RSI indicator analyses the previous average market gains and losses within a specified time period. The time frame is usually 14 days and could be customised by the investors.
RSI analysis the price movements of the instrument are positive or negative and accordingly takes action to earn profits. It is represented in percentage form, and traders have to know what a percentage means. For example, if the RSI fluctuates between 0 to 30, then traders consider it as the oversold market, and when the indicator shows between 70 to 100, it is an overbought situation.
Thus, the indicator keeps moving from zero to a hundred, and traders have to analyse this for correct entry and exit. The markets can have a particular situation for a long period of time, and RSI is not used as an immediate indicator for change.
Average Directional Index (ADX)
A trend trading indicator is used for determining the strength of the trend in the market. Thus, showing the up or downtrend of the market. Similar to RSI, the line of ADX also fluctuates between zero and hundred. If the line moves between zero to 25, then traders call it a weak market trend.
In contrast, if the line moves from 25 to 100, traders say it is a strong market trend, that strength of the trend increases as the line increases value. ADX is presented on the window where directional movement index (DMI) is displayed on the window. It considers two more lines, negative DI and positive DI. On the other hand, ADX identifies the strength of the trend, and the lines define the direction of the trend.
When ADX is above 25 with positive DI crossing the negative DI, it is said to be an uptrend, and traders can enter the market. Whereas the ADX is below 25 with negative DI crosses, the positive DI traders consider a downtrend. In such conditions, traders go for short market positions.
Intraday Trading Strategy
The intraday trading strategy is also called the day trading strategy. In the strategy, traders analyse the market and make quick decisions to earn profits. Traders hold the market position for a day maximum or even can have multiple trade positions in a day. A profitable trading strategy that helps traders identify the market trends.
Day traders are active market investors with professional market experience. They can quickly read the market and trends to make decisions and take short market positions. The short-term market fluctuations make traders earn good profits from their investments.
It is a useful trading indicator used by investors for market analysis. Also termed as the stop and reversal system, the strategy helps traders analyse the market and spot the current market trend direction. Moreover, the strategy gives insight into the potential reversals taking place with the price direction of the trading instrument.
A trend trading strategy that helps the traders hold their market position for long. The market investors who want to trade for long market positions use the strategy. With this method, traders buy and hold the market position for a time period and are not affected by small market changes.
Such traders have a long-term market motive to achieve and therefore concentrate on big gains then worrying about small losses. Traders can use the technical and fundamental analysis tools for studying the market with such a strategy.
How to use Trend Trading?
Traders can follow the given points to use the trend trading strategies in the market and achieve their desired goals. A trader to trade in the market requires a trading account, funds, tools, and trading platform to have a successful trade. So, let’s study the given points for investing and using the trends in the market:
- The initial step is to open an account with a reliable online broker such as Primefin; their traders can visit the website and create their account, www.primefin.com
- The next step is to click on the open an account option and fill in the required information to get registered. It includes name, country code, contact number, email address, and a security password for protection.
- The third step is to provide information to the broker regarding the client’s personal details. After that, traders answer the questionnaire for previous trade experience and upload documents for verification.
- The following step is selecting the account type to trade and deposit the funds. With this, traders have completed their accounts and can start trading.
- Once a trader has an account, trading tools, and trading platforms, they can easily use the facilities and services of the broker.
- The clients select their market to invest, fill in orders and execute them through the trading platforms.
- They can use the technical and fundamental analysis tools for market analysis, indicators and signals for trend directions, and other automated trading expert advisors for market predictions.
- Lastly, traders set their risk management strategy and monitor the trade for opportunities.
The financial markets are quite volatile and require various tools and platforms for investing. Trend trading is one of the trade strategies that help market investors to analyse the price of an instrument and its direction for market predictions. In addition, there are indicators and other strategies which could be used for a correct market decision.
However, traders should be alert while using the tools and use their market knowledge, understanding, and practice for a successful trade.