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You often hear the adage “the trend is your friend”. To be successful at trading the trends you first need to hone your trend following strategies skills. In this article we discuss which strategies work best for trend trading, offer insights on the most useful indicators, and answer some of the most frequently asked questions on creating a successful trend following strategy.
Here’s what we will cover on trend following strategies:
- What is trading the trends?
- Pros and cons of trend following strategies.
- Categories of trends for trading the trends.
- Best Indicators for trend following strategies.
- Trading the trends short term.
- Long-term trend following strategies.
- Trading the trends FAQs.
- Getting Started on Your Trend Following Strategy.
What is Trading the Trends?
Trend trading or trend following is a great entry-level strategy that can provide attractive returns if done correctly. It is a simple yet effective way of finding potentially winning investments, and as the name implies, it involves identifying existing trends and then following them; buying into an asset when the trend direction is up or selling short when the direction goes down. Not only is it popular with beginner traders but also with those who are more experienced.
Pros and Cons of Trend Following Strategies
Trading the trends is a popular strategy, but when should it be your go-to? Here are a few pros and cons to consider before deciding on this approach.
Advantages of Trading the Trends:
- You can spot trends and patterns easily: By honing your ability to recognize patterns, you can follow the trends by spotting a new market upswing before it has even begun - giving yourself an advantage in capturing all of its potential profits.
- Low costs and less transactions: Trend trading offers a major advantage over other strategies. Unlike scalping, which can be adversely affected by high transaction costs, trend traders don't have to worry about hefty fees eating away at their profits - thanks to it being an inherently slow-paced approach that doesn’t require frequent transactions
- Flexible entry and exit points: With plenty of leeway when it comes to pinpointing your exit and entry points, you can afford to be more relaxed. As long as the trend is on the rise, there's no need for strict timing.
- Trading the trends is time efficient: Traders looking to maximize time efficiency can find success when they follow the trends. A popular choice for those who have full-time jobs, this method of investing is a slower process that doesn't require the intense precision needed in other strategies; since trends typically evolve over long periods.
Disadvantages of Trading the Trends:
- False breakouts and low returns: Trend trading can be an incredibly high-risk endeavor, as fakeouts and low hit rates are common. Unfortunately, this combination may mean that many traders experience frequent losses due to breakouts that end up being false alarms. So proceed with caution when considering trend following strategies.
- Fear of missing out is ever-present: When you follow the trends, the fear of missing out (FOMO) is real! To get ahead with this kind of trading, you need to stay sharp and be ready for any chance that comes your way. You may find yourself continuously keeping an eye on market trends to seize an opportunity that could hopefully pay off.
- Trend trading tools can be slow: Trading trends can sometimes be tricky when using charting techniques and tools, as the data may not always provide you with a timely indication of where to enter a position. You need to make sure your strategies allow for this potential delay so you're not caught off guard.
- It’s not easy to go all the way: Not everyone has the intestinal fortitude to follow the trends all the way. It takes real strength and commitment ‒ knowing when it's right to stay in, as well as get out – because markets can change at any time during your trade journey! We've seen countless cases of traders who hold back too soon by cashing out with small wins... only to miss out on bigger opportunities that lie ahead.
Categories of Trends for Trading the Trends
When it comes to trading strategies, trend-following stands out as the top choice for savvy traders. Why? Trends are essential indicators in financial markets that help identify when is a good time to buy or sell stocks, commodities, and currencies.
Uptrends signify growing prices with higher highs; downtrends indicate decreasing values with lower lows; while sideways trends simply mean price action without clear direction - all of which can be used as opportunities by attentive traders!
Let’s take a deeper dive into understanding these 3 trend categories…
Uptrends
Trending up can be a great opportunity for traders to capitalize on an asset's growing value. Instead of just looking at the current price, pay attention to how much it has risen and fallen over time ‒ if you see consistently high highs with only minor drops, that’s likely evidence of an upward trend.
Downtrends
When the price of an instrument goes into a downtrend, savvy trend traders recognize this as an opportunity to enter short positions. They watch closely for assets dropping below their lowest point -often lower lows and lower highs can indicate potential downward trends- where they would then exit the market by selling off those assets. Recognizing these patterns in asset prices is invaluable knowledge that experienced traders utilize to time important investments.
Sideways Trends
A sideways trend is often the sign of a stagnant market, where prices remain relatively consistent rather than reaching extreme highs and lows. This kind of movement isn't always advantageous to long-term traders, but savvy scalpers can take advantage in order to make quick profits on short-term positions.
Best Indicators for Trend Following Strategies
When it comes to buying or selling securities, there's no one-size-fits-all trend following strategy. However, experienced traders look to popular indicators in order to gain an analytical edge and make informed decisions when trading. From Moving Averages (MA) and Relative Strength Indexes (RSI) to Bollinger Bands, these tried and true strategies will help you craft trend-following investment plans that work for you!
Let’s have a look at some of the most utilized indicators for trading the trends…
Follow the Trends with the MACD
With the Moving Average Convergence Divergence indicator (MACD), you can make a smart assessment of price changes over two different data sets. Whether it's short-term movement or long-term trends, this comparative analysis tool helps traders focus on time series that have stabilized, and identify potential opportunities for investment. It looks to compare fluctuations with its moving average; if one is higher than expected while the other is lower, then it may be wise to take an early 'short' position before there are further losses. You can potentially keep your trend following strategy ahead of market movements by using the MACD indicator.
Trading the Trends with Bollinger Bands
Bollinger bands are a helpful tool for tech savvy traders, providing an accessible and easy to read signal of market price fluctuations. Composed of three lines: Upper Bollinger band, Middle Bollinger band and Lower Bollinger Band. This complex technical indicator provides users with valuable insight into the volatility associated with their investments by graphing two standard deviations away from the mean average.
Tracking price movements is an important part of trading and Bollinger bands are a fantastic tool to help chart the trend. By placing two standard deviations away from the mean average, this method ensures that more than 80% of all prices stay within range; making any deviation highly significant in terms of potential trade decisions or when it might be time to exit markets.
Amplify Your Trend Following Strategy with Relative Strength Index (RSI)
RSI is a great tool to measure the strength of assets so you can better follow the trends. It's calculated with an easy-to-use formula, which gives you insight into how quickly and effectively prices are changing over time. When RSI values start reaching above 70 or below 30 respectively, it can indicate whether certain securities may be becoming "overbought" or "oversold". This important information allows investors to modify their trading strategies for better chances at successful trades.
Follow the Trends with Moving Averages
If you're looking for a reliable way to anticipate market trends, then look no further than the age-old moving averages indicator; an invaluable tool for your trend following strategy that provides detailed insight into asset prices. By taking a long or short position based on whether prices are above or below the simple moving average, investors can gain valuable information and make decisions with confidence. OBV Indicator
Parabolic SAR Indicator for Trading the Trends
The Parabolic SAR is a great tool for traders who want to follow the trends and stay ahead of the market. This useful indicator helps identify current trends and potential reversals, so you can make informed trading decisions that maximize your gains.
Use Donchian Channels Indicator to Follow the Trends
The Donchian Channels indicator is a great tool for traders to use in understanding market trends. It can help discern whether the trend will remain bullish or shift down into bearish territory, with alert signals provided by three lines - one at the middle and two others surrounding it. The upper line of these channels denotes when price movements start reaching their peak while the lower line shows where they fall below average volatility. By monitoring activity between these points on your chart, you'll get insights that go beyond what Bollinger bands show alone.
Trading the Trends Short Term
Short-term trend traders are always seeking to capitalize on small price fluctuations that take place over the course of a single day. Popular short-term trend following strategies include scalping and intraday trend following, offering investors multiple opportunities for success with each providing its own unique edge in the market.
Traders who apply intraday trend following strategies, for example, look at fluctuations and movements in price, such as an uptrend with relative highs and lows over a few minutes or hours. To capitalize on these trends, trailing stops are used to get out quickly if the tide turns against them ‒ plus it's also great for those seeking profits from short selling strategies
Long-Term Trend Following Strategies
Long-term trend following strategies require investors to commit for the long haul, usually weeks or months – sometimes even years. Instead of short-term price fluctuations, savvy traders investigate market fundamentals with an eye toward upcoming trends and their key drivers. It takes a special brand of insight and determination to be successful in the world of long-term investing.
For traders in it for the long-term, position trading is a popular way to capitalize on their investments. With this method, they can buy and hold onto their positions without worrying about short-term fluctuations - but that doesn't mean trends should be overlooked entirely! After all, if those around you are jumping into a trend too late or leaving early then you could miss out on your goal of reaching great gains over time. So when evaluating potential market movements keep an eye on fundamentals as well; doing so may just help make sure opportunities don't slip by unnoticed down the road.
Trading the Trends FAQs
FAQ #1: What is the Best Trend Following Strategy?
The Moving Average Crossover strategy is an excellent way to start applying a trend following strategy. By using three Simple Moving Averages (SMAs), this strategy provides objective signals in order to identify trends and help make those important buying decisions. Even though MAs are lagging indicators that reflect past performance rather than predicting the future, they remain one of the most popular among traders.
FAQ #2: Can I Use Trading Signals to Follow Trends?
Trading signals are an additionally useful tool when carving out your trend following strategies. Some reliable providers offer high quality insights from the market by experienced market analysts. By joining a trusted chat group, you can get signals on trends without needing to do extensive research.
Getting Started on Your Trend Following Strategy
In conclusion, trading the trends is a great way to maximize your trades. We’ve discussed what it means to trade the trends, both its pros and cons. We went through the different categories of trends and identified some great indicators for trend following strategies. Additionally, we explored both short-term and long-term trend following strategies as well as frequently asked questions about this form of strategy.
Now that you’re equipped with all of this knowledge, you can get started on your own trend following strategy, by joining our telegram trading community!
Doing so will give you access to up-to-date market information suitable for executing optimal trades every time. Armed with these new tools and insights, you can now confidently embark on the path towards becoming a skilled trader of the trends!
