Trend following is a trading strategy in which you follow the trends of a particular asset, allowing it to dictate when you buy and when you sell.
For instance, when the price trend goes up, you would buy a particular asset, and when it goes down, you would sell the asset. Trend following doesn’t require you to do any predicting of when the market may rise and fall to specific price levels.
Rather, it is merely jumping on a trend and riding it out. The trend-following strategy partially contributes to the tendency for a financial market price to fluctuate continuously in one direction for a certain period of time as investors are encouraged by others to buy or sell in waves.
A simple trend following system allows for even the most inexperienced trader to understand and profit from the financial market. Your trend following system will depend on your preferences but can include using a long-term trend following system (LTX).
There are many types of available software that simplifies the process of trend following:
TREND TRADING STRATEGIES & SYSTEMS
It’s important to use a trend trading strategy that works for you. As with everything that has to do with trading, the experience is very individualized. There are three types of trends: strong, weak, and healthy. Your strategy will depend on when you want to trade.
Think about what market you’re trading in, the timeframe, your entry trigger, and your exit period. In general, if the market is in a strong trend, you should enter your trades on a breakout or lower timeframe. If it’s in a healthy trend, you should enter your trades on a pullback towards the moving average. If it’s in a weak trend, you should enter your trades at Support or Resistance.
HOW DO YOU DEVELOP A TRADING SYSTEM?
Developing your own trading system is easy when you have the right tools. A good trading system is one that’s oriented around your personal goals, time frame, capital, and preferences.
Therefore, when you are first trying to develop a trading system, you should start by choosing a timeframe that works for you. Think about how long you might want to hold a trade, whether it’s for several days or several weeks. If this is the case, you should use daily charts as you are more of a swing trader. If you want to be more of a day trader, then you should choose shorter time frames.
After you decide on your time frame, you need to choose indicators that will help you identify a trend. You can use multiple to help you cross-reference and confirm that a specific trend is happening. This is the best way to reduce the risk of identifying a false trend.
The next step is to define how much you are willing to lose on each trade you make, also known as identifying your risk. As a rule of thumb, you don’t want to risk too much on a single trade. You should shoot for 1%-2% of your capital to risk. By doing this, you can finally figure out where you want to exit and enter a trade. This depends entirely on your trading style.
This means that you can wait for a good signal from an indicator even if the candle is not yet closed, or you can wait for the close of the candle. Waiting until the close will reduce risk but may not produce as much reward. Therefore, this is completely dependent on your preferences.
HOW DO YOU IDENTIFY A TREND IN TRADING?
In order to identify a trend in trading, you have to first understand what a trend is. A trend is a general direction in which a market or asset price moves. This can either be identified by trendlines or price action that defines whether the price is in an uptrend or downtrend.
A trendline is a visual representation of an asset’s price fluctuation, including direction and speed of price change. It can also be used to identify patterns during specific periods of price change.
Using a trendline, you can identify and follow a trend. For example, an uptrend is shown as an upward slope of the trendline as it indicates an overall increase in price. An important thing to note is that the market always changes, so there will likely be oscillations of the trendline. However, you want to look at the big picture to see whether the overall direction is increasing.
A downtrend is the exact opposite. It is identified as the overall downward movement of the trendline. There may also be periods of time in which a trend isn’t apparent, called a range. This will appear as a period in which there is very little overall upward or downward movement.
What Are The Best Trend Indicators?
Price Action – Looking at price action is a great way to identify when a trend is ending or beginning. Price action refers to viewing the market structure and momentum as a way to indicate appropriate trading opportunities. Price action includes looking for uptrends, downtrends, and ranges. An uptrend consists of higher highs and lows, resulting in an overall higher trend. Alternatively, a downtrend consists of lower highs and lows that result in an overall downward trend.
Line Chart – A line chart connects all of the closing prices together in a line in a much simpler and cleaner way that makes trends easier to identify. Generally for a line chart, if the line points higher, the market is experiencing an uptrend. If it is pointing lower, then the market is in a downtrend. If the line is flat, it’s displaying a range.
It’s important to note that line charts are mostly good for identifying the direction of a trend, but shouldn’t be used to completely make your trading decisions. This is because it shows only the closing price, not the high or low of the day.
Moving Average – A moving average is a great trend indicator that effectively summarizes previous prices and plots them as a line. Despite the fact that this is a lagging indicator, it’s still an effective way to identify the direction and strength of a trend. For this method, if the line moves above 200MA (Moving Average), then it shows a long-term upward trend. If the line is below 200MA, it is a long-term downtrend.
Trendlines – As previously mentioned, a trendline is an extremely effective way to identify a trend. If the trendline is pointing upward, it indicates an uptrend and vice versa. Moreover, it’s important to take note of the angle of the trendline. The steeper the angle, the stronger the trend.
How Do You Follow A Trend In Trading?
How Do You Determine The Strength Of A Trend?
Knowing the strength of a trend is an integral part of trading because it can help reduce risk and increase profit potential. One way to determine the strength of a trend is to use trend indicators. For example, you can use the moving average to identify the strength of a trend. In a strong trend, the price tends to stay above the 20MA when looking at the shorter-term moving average. The slope of a trendline can also be used to identify the strength of a trend. The greater the slope of a trendline, the stronger that trend is.
However, these aren’t the only ways to identify the strength of a trend. You can also look at the average directional index or the ADX to determine when a trend is strong. The ADX completes calculations that are based off a moving average over a period of time and is not directional. In this way, it registers the trend strength of both upward and downward trends.
It looks like a single line with values ranging from zero to one hundred with one hundred indicating high strength. An ADX value less than 25 is considered weak, while anything above is considered relatively strong. The higher the value, the higher the strength of the trend. When reading the ADX line, it is important to keep in mind that when an ADX line is decreasing, it doesn’t necessarily mean that a trend is reversing. It simply means that the trend strength is decreasing.
How Do You Know When A Trend Is Over?
Knowing when a trend has ended is important to trading profitably because you want to be as well-informed as possible when it comes to completing a trade. If you don’t know whether an uptrend or downtrend has ended, you also won’t know what direction the price is likely headed. It’s difficult to predict when a trend will end, but you should always keep an eye out for when the market starts to become stable because there’s always a chance that it may indicate a reversal.
Additionally, you need to look at past trends for your particular asset. Usually, looking at previous trendline breakouts can be useful in determining the probability of the current trend ending. When a trend is fully finished, it’s usually clear after several cycles of the new trend, which is more of a lagging indicator.