Trading trends and developing a viable trend trading strategy are integral elements of trading. Most of the successful traders often emphasize “trade the trend.” Why, because trading trends alone is enough to make sufficient money.
- Trend trading is one of the most profitable trading strategies.
- It significantly increases your winning chances, improves risk management, and can also be applied in different financial markets.
What is trend trading?
Trend trading is a trading technique that capitalizes on the momentum of a particular financial instrument in a particular direction. Trend traders wait until a defined trend appears in the market before taking a trading position. Trend trading technique proves extremely profitable on different timeframes. Whether you are a day trader, swing trader, or a long-term investor, trend trading has the potential to stack all the odds on your side.
Why trend trading is one of the most profitable trading techniques?
We often read or hear about an expression that trend is your friend. If you trade with the direction of the market, you often end up on the winning side. The reason is, the market trend is your true friend. Even if you get your timing wrong, the driving forces behind a market trend do you a favor and also eliminate the risk ratio. Moreover, identifying the trend correctly, especially the strong ones, increases the profit potential. Remember that trend trading offers more pips than counter trading.
How do you trade the trend?
In the simplest of words, you identify the direction of the market trend, enter the market, and wait until the trend reverses. What are the steps to trade the trend?
- Identifying the trend is the first step. You cannot trade the trend if you fail to identify that a trend is in place.
- Enter the market at a low-risk entry point and set the initial stop-loss level fairly close to the entry point. A wide trailing stop-loss keeps you in the trade for a longer period and doesn’t force you out of the trend.
- When your trend-following strategy is right, you make substantial profits. When you get it wrong, you incur minimum losses because of closely placed stop-loss.
How do you manage risks while trading trends?
The biggest advantage of identifying the trend and then trading trend is that you can manage your risks carefully. The best way is to keep your risks minimum on each trade so that you can bear losses, sometimes a string of losses, without losing too much money. Secondly, you can also keep your trading position small to diversify your portfolio. When a portfolio is diversified, there are more chances of catching a large trend in at least one or more trading positions. However, don’t diversify too much because it will decrease profit potential even if you do catch a strong trend. Balance is the key here.
Backtest your trend trading strategy, optimized risks on all trades, and maximum exposure assist in finding the exact position size. Thus, you have lots of options to manage your risks carefully when trading trends.
How to identify a trend?
In order to successfully trading trends, it is crucial to know how to identify a trend in the first place. Identifying the trend is quite a simple task if you know about what is exactly a trend.
A trend is established whenever a series of higher highs and higher lows or a series of lower lows and lower highs appears on a trading chart. A trend is more strong when series of higher highs and higher lows is more consecutive or vice versa in case of downtrends. However, it takes a lot of skills and ample experience to read the charts and identify the direction of the market successfully.
When to enter trend?
There are two best ways to enter the trend to make the most of it. However, entering a trend depends on the strength of a trend.
- Entering a strong trend: A strong trend in the market is when buyers have complete control of the market. The selling pressure is always negligible during strong trends. The best way to enter a strong trend is on a breakout or enter on the lower timeframes. The reason is you cannot enter a strong trend on a pullback because market retracement does no exceed 20MA. That means, the chances of market retracement and then continuing moving higher are extremely low.
- Entering a healthy trend: When the buyers have a strong grip over the market but selling pressure is also there, the market trend is considered healthy. In a healthy market trend, you observe decent retracements, usually up to 50MA. That means you can enter the trend on both, pullbacks and breakouts. However, the best way is to enter on a pullback. If you enter on breakouts, you have to endure the market retracement back to 50MA.
- Entering a weak trend: Whenever there is a great tussle between buyers and sellers, the trend gets weak. Although buyers have a slight edge over sellers, the market often takes steep pullbacks. That makes it difficult to predict the retracement. Moreover, a weak market trend tends to break highs before retracing extremely low. Thus, support and resistance levels are the best spots to enter a weak trending market.
How to develop your trend trading strategy?
In order to develop an effective trend trading strategy, you have to consider various factors. Beware of the fact that without proper risk management plans and discipline, all trend trading strategies, even the best of them, are doomed to fail. Moreover, you also consider the following factors to develop an impactful trend trading strategy.
- Financial markets of your choice
- Your preferred timeframe
- Conditions of your trade setup
- Stop-losses and entry triggers
- How to exit winning trades
- How to manage trades
Trend trading is one of the most profitable trading strategies. It significantly increases your winning chances, improves risk management, and can also be applied in different financial markets. However, you need to learn how to identify a trend successfully. Although it isn’t rocket science still requires skills and ample experience. Moreover, you should also master the art of entering a trend. That is what makes you a successful trend trader.