Why Trend Trading?
A famous expression still lingers the trading industry for ages. “The trend is your friend” has by some means proven its rationality for some time now. You can learn in this article certain benefits of following a trend trading strategy.
Trend Trading Defined
Trend trading is a strategy being employed by a number of traders of various trading levels. It is a famous strategy being followed since the guidelines are easy to follow and the trends are easy to identify, then trade.
In addition, trend trading is one of the many strategies in trading that uses and employs technical analysis to be able to point out a trend or its probable direction. Doing such analysis can help a trader to forecast and determine the proper entry and exit points when making a trade. This strategy can be applied in a wide array of assets and markets like the stocks, bonds, commodities, currencies and futures.
The goal of trend trading is to capture gains by identifying a certain asset’s momentum going in a specific direction.
Trade Trading Employed
With the use of technical analysis, a trader will be able to study and evaluate the direction of a trend and the course where it is headed. Hence, the trader can position himself depending on the way of the trend. A trader chooses to follow the direction of the trend to create price patterns (upward or downward).
Aside from technical analysis, historical data can also be considered to determine the trend or pattern in the price of a stock.
A short position is being exercised if the trend shows a downward movement (consecutively lower highs) in a certain stock, currency or commodity. A long position is being entered if the trend shows an upward movement (consecutively higher highs).
For this reason, traders will stay in their current position until such time that the trend has reversed.
Trade Trading Indicators
Since the goal of trend traders is to isolate and obtain profit from trends, there are a number of known ways to be able to do this. There have been established indicators that have stood the test of time and have passed on from several generations of traders.
- Moving Averages
To utilize this indicator, a trader must look at the angle of the moving average. If the direction is going horizontal, the price is not trending. If it angles upward, then an uptrend is in progress.
- MACD (Moving Average Convergence Divergence)
This is a fluctuating indicator moving above and below zero. This indicator can be used when following both trend and momentum. To use this one, a trader must look at which side of the zero the MACD lines are on. If it goes above zero for a persistent time, the trend is regarded as a down.
- RSI (Relative Strength Index)
Like the MACD, the RSI is also another fluctuating indicator. When interpreting the RSI, a trader must view the price. When the indicator is exceeding 70, the price is seen as overbought and must therefore be corrected, whereas an indicator under 30 is seen as an oversold price and is due for a bounce.
During strong uptrends, the price goes 70 and beyond for a constant period and downtrends often remains at 30 or below for a while.
- OBV (On Balance Volume)
This indicator is able to measure accumulated buy and sell pressures by means of adding the volume on winning days and subtracting volume on losing days. Volume can show trends. When prices are rising, there is a rising OBV, whereas when prices are falling, the OBV falls as well.
Trading is just like fishing. Of course you would like to go with a pond with more fish. Hence, being able to identify the weak and strong trends in the market gives you more potential to take more gains.
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