TREND TRADING STRATEGY
Trend trading, as the name suggests, is a strategy where you capitalize on upward or downward trends in the market and come out ahead. The most important strategy when it comes to trend trading is having discipline and knowing when to take a calculated risk. Trend trading is a versatile trading strategy that can be utilized in long, intermediate, and even short term positions.
A SIMPLE TREND TRADING STRATEGY
The simplest trend trading strategy to employ if you are just starting out is to follow the upward and downward trends. You should buy an asset if there is an upward trend and sell the asset if there is a downward trend. There are several variables that you can take into account before you enter the market.
This can include the time frame that you are looking at, whether you are trading long or short, and the amount of risk you want to take on. In fact, although there are hundreds of thousands if not millions of trend traders, most do not make the same decisions because an upward trend for one person may not register as an upward trend for another.
It’s important to stay vigilant with your trading analysis and pay attention to trading indicators to make the most informed trading decisions.
Here are some things to remember while trend trading:
The trend is stronger if the given time frame is also longer.
Trend trading on longer time frames has a significantly lower risk of loss.
Identifying a trending position does not mean it will continue to follow that trend.
Riding a trend is easy, but knowing when the trend will reverse is more difficult.
In shorter time frames, the market spends more time in consolidation, thus making trend trading more difficult.
The shorter the time frame, the more noise there is in the data.
BEST TRADING INDICATORS
Moving Average Trend Trading
A moving average is essentially the average price of your asset over a certain period of time. Stock and crypto data is very noisy. There are millions of trades a day and it can be easy to get lost in the minutia. A moving average smoothes the data and allows you to focus on the most important question: is the market moving upwards or downwards?
The period of time you would like to focus on is up to you. The most popular ranges are 50 days, 100 days, and 500 days. There are several tools online to help you find the moving average for your asset and once you do the next steps are very simple. Take a look at the moving average graph and see if it is angled upwards, downwards, or ranging. It is important to note that just because you see that the moving average angles upwards, it does not mean that the market will continue to go upwards. It is simply another data point you can use to make your next trading decision.
The RSI index
The On-Balance Volume is a way of showing the volume of trades in any given day. This indicator tells you how much buying or selling pressure there is. On days where the asset is up, the volume is added, and on the days where the asset is down, the volumes are subtracted. You will want to consult the OBV and consider whether the prices of the asset are in correlation with the OBV.
The price as well as the OBV should rise together, if not there may be a reversal coming in the market. When you are looking to enter into the market, looking for assets that are low in price but high in OBV is one strategy that can help your trend trading.
The On-Balance Volume is a way of showing the volume of trades in any given day. This indicator tells you how much buying or selling pressure there is. On days where the asset is up, the volume is added, and on the days where the asset is down, the volumes are subtracted.
You will want to consult the OBV and consider whether the prices of the asset are in correlation with the OBV. The price as well as the OBV should rise together, if not there may be a reversal coming in the market. When you are looking to enter into the market, looking for assets that are low in price but high in OBV is one strategy that can help your trend trading.
TREND STRENGTH INDICATOR
The strength of a trend is important to consider before entering into any trade.
If the strength of a trend is strong, the risk is reduced and that directly translates to higher profits. A trend’s strength can be calculated through ADX. ADX is calculated via moving average of the expansion of a price range over a period of time. There are several tools online that can help you find the ADX of any asset, but it’s important to know which ranges correlate to what conclusion.
ADX has a range from 0 to 100 and the higher the number the stronger the trend. However, any ADX value above 25 suggests that there is a strong trend. Any value below 25 suggests that there is either no trend or a very weak trend. 25 is a great baseline, but as the number approaches 100 you can feel more confident that it is a very strong trend.
If there are several indicators that suggest there is an upward trend and the strength of the trend indicators are high, these are factors that suggest you should enter the market. There are several trend traders who swear by their methods and believe it is the most superior form of trading.
We personally know that trend trading is a powerful strategy, but it could be advantageous to learn other trading strategies as well. However, at the core all trading strategies seek to do the same thing; take information from the market and deduce where the market is going.
TYING IT ALL TOGETHER
If you are a beginner at trend trading, all of this information may appear daunting. It is very possible that you employ all of the strategies detailed in this article, and you still get burned by the market. How could it be that others who are following the exact same philosophy as you could be much more successful in the stock market? The answer lies not only in the tactics but also the execution.
At the end of the day, your trading success will be tied very closely to your level of discipline. Learning the technical aspects of trading can be achieved in a relatively short period of time, but the discipline to stay in a trade when others begin to exit is what differentiates a good trader from a great trader.
Trend trading is especially difficult to execute while keeping a level-head. In every step of the process, whether you are entering the market, leaving the market, or staying in the market there is a significant amount of uncertainty. An experienced trend trader is able to analyze the market and find the best entry point and hold their position whether the price fluctuates positively or negatively.
An experienced trend trader is able to have a general idea of when to leave the market, but also be vigilant and ready to leave the market early when opposing signals start to appear. Lastly, an experienced trend trader knows whether he leaves the market with more or less than he started, he does not emotionally execute another trade. In more ways than one, beating the market starts by beating yourself.
Successful trend trading strategies are just that, a strategy. Strategies are always subject to change, and plans always become better as you digest more relevant information. After reading this article, we hope that you can enact and execute your plan successfully.