Trading without following any strategy is a reckless decision that often leads to losing trades. It is just the same as gambling and relying on pure luck. Profitable traders spend a lot of time developing their own strategies on demo accounts before trying them out in live trading. There are several trading strategies that one can adapt on his own trades. In this article we would talk about the basics of a strategy called trend trading.
What is trend trading?
It is a common belief that the market doesn’t produce a random trend. Rather, it creates an established pattern that repeats itself over time. Trend trading is a trading strategy based on the principles of technical analysis. It aims to capture gains through a security’s momentum in a particular direction. Traders take positions along a cycle of price movements: entering into a long position during an upward trend and shorting when it is on a downward trend.
There are several different techniques, calculations, and time-frames that can be used to determine the general direction of the market trend. These include moving averages, market price, and channel breakouts. Traders who employ this kind of strategy do not aim to predict the behavior of the market; instead, they jump on it and try to ride it while maximizing the profits along the way.
Buy low, sell high
One good way to maximize profits through trend trading is by knowing when to enter the trade and when to exit. This is where the “buy low, sell high” principle comes in. Knowledgeable traders understand how important it is to wait in an effort to enter the trend as cheaply as possible. At times that the trend starts to fall off, a trader should also know when to exit the position before the loss becomes too unbearable. A trend trader does not aim to enter and exit at the very peak of the trend. Instead, he waits for the trend to move to a stable direction to ensure that the trend is safe to ride on.
Some rules in following the trend
It is advisable to wait for a trend to become more stable as a volatile one can be very hard to predict. To recognize a stable trend, most traders allot a specific time-frame to analyze with a certain number of days that can act as an indicator. For example, if a trader decides to use a 100 day time-frame, he would wait until the trend has been going in a certain direction for 20 days before he calls it as a stable uptrend or downtrend. The next step is to analyze the events that trigger this or the usual times of the year when it happens so the trader can anticipate it the next time it shows.
There is also an old saying that goes “the trend is a friend until it ends”. In trend trading, traders do not aim to accurately predict the peak of an uptrend or a downtrend. Instead, they ride on a trend until it makes a reversal before they exit it, cutting their losses and letting their profits run.
Another rule in trend trading is maximizing your profits on any direction you ride. Most traders trade in a mixture of long and short positions. If the trend is going up, take a long position and ride up with it. If the trend is going down, take advantage of it short selling. In any direction the market moves, there may be profits to catch along the way.
Read more about short selling against the market.
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