A comprehensive guide on trend trading and its benefits
The trading strategy you use while trading plays a vital role in deciding the size of profit. Thus, before entering the forex market, it is important to choose your trading strategy. Usually, traders select between two popular strategies to take and analyse a trading position in security: trend trading and range trading.
Range trading is a technique where traders try to set a range between resistance and support levels. Moreover, they attempt to gain profit from downward and upward price shifts between those levels. On the other hand, trend trading is a longer-term technique where investors try to take trading positions in a particular direction or price movements. In this article, we have presented the concept of trend trading with its benefits.
What is trend trading?
Trend trading is a technique that relies on technical indicators to determine the price movement or the direction of financial momentum. The entire concept of this trading style lies in analysing the price moment, and historical trends because it predicts what may come in the future.
Trend trading is regarded as a long or mid-term trading technique, but as per many theories, this can cover several timeframes, based on the duration of the trend. Traders who prefer swing trading style and position trading style generally use this technique to harvest profit. Position traders are the ones who hold their trading positions for a long ignoring small and daily price fluctuations. Whereas, swing traders are ones who identify a trend and follow the same from beginning to end.
How to determine a trend
Trend trading technique helps traders determine the trend as quickly as possible and exit the financial market before this trend goes against them. Typically there are three broad categories of the market trend: downtrends, sideways trends and uptrends.
1) Downtrend: When the price declines in the financial market, it is regarded as a downtrend. Trend traders attempt to benefit from these price movements by entering a short position when the asset price declines to lower price levels.
2) Uptrend: When the price surges in the financial market, it is regarded as an uptrend. The traders attempt to benefit from these price movements by entering a long position when the financial market is proceeding towards high price points.
3) Sideways trend: When the price neither declines (or reaches lower price points) nor surges (or reaches higher points) it is regarded as a sideways trend. Many trend traders do not pay heed to this trend, but scalpers and range traders (who wish to seek benefit from short market movements) will find profit from these bounded movements.
Top technical indicators used in trend trading
Catching or predicting the trend in the financial market is a complex task that requires deep observation of market fundamentals and conditions. The technical indicators provided below helps in predicting the right trend.
You can see these indicators on various trading platforms. Also, some financial service providers offer these to their clients. One such authentic firm is T1markets, regulated and authorised under the Cyprus Securities and Exchange Commission. It offers various research and educational tools to predict trends and pursue trading in the right direction.
1) Regression channels: It is a kind of price channel that uses different time frame analysis to determine where the trend bias or price trading is heading. It uses a mathematical algebraic formula to estimate lower and upper support & resistance level and median price line. These resistance and support levels probably accompany the price line.
2) Moving Averages: Moving averages is one of the most simple indicators to spot a trend. It is calculated by summing up ‘n’ closing price periods and then finally diving it by ‘n’. The common moving average indicator is the 200-day moving average. It shows price data of about one year.
3) Speculative Sentiment index: The SSI or Speculative Sentiment Index is a unique indicator which shows what market participants think about a particular trend at a given time. This index estimated the total number of traders holding short trading positions in a currency pair and comparing it with the number of traders holding long trading positions in the same pair.
4) Ichimoku cloud: The Ichimoku cloud tool uses volatility, direction and momentum data to estimate the intensity of a price trend and provide signals about whether it is weakening or stable.
The major advantages of employing trend trading
1) Many trend-following techniques attempt to determine the financial market’s direction and also indicate that there are enough possibilities for momentum to form a new trend or not. These trends help in making a potential decision. If you find that these trends will last for years, you can hold your position for a longer span.
2) The second advantage of following trend trading is low transactional cost. Though being a slow-paced trading technique, there are no issues with the transactional cost. When we compare it with other trading forms such as day trading, we will find that traditional cost makes it hard for traders to continue with them.
3) Trend trading does not require much time. It is a slow-paced trading technique and can be followed by those in a private or full-time job. Trends develop for the long term, and also, extreme precision is not a decisive factor. Hence, as a trader, you can place trading orders for the following day after the market closes. With other trend trading techniques, it may even be a case that you must place trading orders only once a week.
The Bottom Line
You all must have seen or heard that trend is a friend. The financial market and financial market gains work on this major concept. Trend trading deals with determining the direction of market momentum. It is an excellent way to harvest profit from the financial market if your choice of brokerage firm is right.
An authentic firm allowing traders to speculate on number tradable assets is T1markets. It allows trading on forex, cryptocurrency, commodities, metal, indices, stocks at a minimum deposit of just $250. It offers various educational and research tools to analyse your trade, including trading signals, latest news, report season calendar and trading signals. You can visit the website of the broker to know more.
Frequently asked questions
Q1) What does trend trading symbolise?
Trend trading is a technique which relies on technical indicators to determine the price movement or the direction of financial momentum.
Q2) What are the moving averages?
Moving averages is one of the most simple indicators to spot a trend. It is calculated by summing up ‘n’ closing price periods and then finally diving it by ‘n’. The common moving average indicator is the 200-day moving average.
Q3) What is the major advantage of trend trading?
Many trend-following techniques attempt to determine the financial market’s direction and also indicate that there are enough possibilities for momentum to form a new trend or not. These trends help in making a potential decision.