Although it’s been around since the dawn of the stock market, trend trading is only recently gaining recognition as a challenging and rewarding way to make some gains in the financial sector.
It is an intricate process that brings incredible benefits to those who pursue it correctly. But what is it, and how can one get into it? Let’s find out.
About Trend Trading
According to Investopedia, trend trading consists of analyzing an asset’s momentum either going up or down and capturing gains due to it. In this particular strategy, one has two options depending on the type of trend identified. When a stock is moving in an upward direction by exhibiting successively higher highs, you enter on a long position.
Conversely, if the stock is in a downtrend with successively lower highs, a short position is open. Depending on the underlying conditions on the market, these movements go on for days, weeks or even months at a time. However, they are sometimes suspended by unforeseen changes, such as government interventions.
3 Valuable Tips for Trend Trading
Getting started is easy. All you need is a reliable system at first. A lot of people use Metatrader 5, or the mt5 platform for short. Still, there is a lot more that you need to bring to the table if you want to succeed in this game. Installing software is simple, but gaining the necessary knowledge to use it toward your goals take a bit more time and ambition.
Like all the other varieties of this occupation, trend trading is sometimes unpredictable and hard to get into. However, with a little expert knowledge and a lot of patience, you too can master this art.
Here are 3 valuable tips that will help you become one of the best trend traders out there.
1)Use the Strong/Weak Approach
The surest way to approach trend trading and come out on the winning side is through the strong/weak approach. When you put the strongest currency (buying) against the weakest one (selling), a lot of beneficial moves on the market are made available to you. This allows you to make transactions with an edge.
But how do you find this pairing? Well, the simplest way is to use a moving average tool. This consists of the sum of ‘x’ closing periods divided by ‘x’.
The most common type is the 200-day one, which contains roughly a year or so of price data. You can make your own charts and decide which major currencies of the world are strong/weak when put up against each other.
2) Wait for the Counter-trend
Known as the “golden rule” of trend trading, it’s no secret that any tendency, no matter how long-lasting, will encounter an intraday or intraweek counterreaction which is triggered by various factors such as major news releases that go against it. This is not to be feared. In fact, one important lesson to be drawn is that this is an amazing opportunity.
People who have entered the trade short-term will get scared out of their position when this happens. But if you’re in it to win it, you need to hold your ground because you have a chance to buy dips in an uptrend or sell rallies in a downtrend.
3) Protect Yourself Against Reversals
At the end of the day, the one thing that can truly be predicted in trading is that it’s completely unpredictable. This sounds like an oxymoron, but it is actually an important aspect to be kept in mind. Even forecasts made by the best analysts can change in the blink of an eye due to unexpected governmental interference or any other geopolitical and social factor.
This is why you must protect yourself against trend reversals. To do so, set some stop-loss orders along with the tendency. This entails that, if the price of an asset moves above or below a predetermined level, you need to buy or sell it right then and there.
However, these margins need to be carefully considered, because if the change is only temporary, you will risk being locked out.
The strong/weak approach to currency trading is the best way to go about this.
However, if you want to spice things up, staying alert and spotting counter-trends is also immensely rewarding. Just remember to protect yourself against any reversals that might take place along the way.