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Trend trading is a widely used strategy by beginners and experienced traders alike. By exploiting the market’s direction, a trader can profit from the momentum with an advantageous risk to reward ratio. Before diving further into trend trading, let’s go over the most frequently asked questions for a basic understanding of the content.
What is a Trend Trading Strategy?
Trend trading is a strategy where the trader surveys a chart and seeks to profit by capitalizing on a market trend. The trends may be short, mid, or long term, and can be identified by visually examining the chart. Look at the daily, weekly, and monthly trends for a clear understanding of the overall chart direction.
Does Trend Trading Work?
To maximize profitability, some basic understanding of the market and how to read a chart is essential. A trader will analyze the trend and decipher the best time to enter and exit a trade over a set timeframe. Trend trading is an effective way to trade forex especially when the trader is well versed in interpreting a chart and catching a trend early.
How Long Does a Trend Last?
By definition, a trend is a change or development in a general direction, and there are no guarantees in how long a trend will last. Within the Forex market, the market trends about 30% of the time and can be either short or long term. A trend can last anywhere between a few hours and up to a few months.
How do you Know When a Forex Trend is Ending?
When analyzing a chart, one of the best ways to identify the end of a trend is by following the trend line. If you detect a change in the pattern’s direction, the trend is likely starting to change.
Trend Trading Strategy
The path to success in trend trading is rarely a straight one.
Trend trading, also known as trend following, is the trade of a given asset in a pattern of upward or downward movement. These trends occur when prices experience higher highs and higher lows, which is called an uptrend. You can recognize an uptrend when you can draw an ascending line (support line) that connects the higher lows. Ideally, the uptrend will maintain the formation of higher highs (resistance), which can be identified the same way, by drawing a line. Those lines create a parallel uptrend trading channel.
The same pattern can develop in the opposite way. A trend that forms lower highs and lower lows is called a downtrend. Similarly, by drawing the lines to connect the highs and the lows in descending order, we can see if the move is developing a downtrend trading channel.
Which part of the trading bar/candlestick should I use as a point of connection?
According to chart analysts and trading professionals, it is either the body of the candle (closing price) or the thin wick below it (the lowest price) on the lower line of the trend. On the upper line of the trend, you would look at the thin wick above the body (the highest price).
Drawing the channel line correctly helps us understand if the price action fits into a channel, and thus shows us when an inflection point or a breakout may occur. Once the price reaches the inflection point, say the upper trendline in an uptrend that has previously connected at least two higher highs, the price has the option to go back into the channel or break above it. This is what trend traders call a continuation point or a breakpoint depending on the price behavior. What the price does at that moment will define if the trend will be invalidated or confirmed. If the price breaks above, we can expect further appreciation and the formation of a new trend. If it stays in the channel, we can expect the asset to depreciate, ideally to form a higher low (when in an uptrend). There is, however, a false breakout. It is quite common and what it is, is price experiences a breakout of the trading channel only to go back into it after a certain period.
Trends tend to form in every market for every asset.
Trends appear in every timeframe, from 1-minute charts to monthly charts. Some Trend traders will look at daily charts to define the formation of a sustainable trend, while others go down to 4-hour charts to fine-tune their trendlines and mark the timing of the connection points.
How can you tell if an asset is in a bearish or bullish trend?
By pinpointing and “connecting the dots” on a daily chart, you can get a strong indication of an asset’s movement. This can help define whether the asset is in a bearish or bullish trend. A trend is most visible and sustainable in the medium-term to long-term. Generally, trend followers hold a position in a certain asset for months until the trend changes.
Trendlines are not limited to an uptrend or a downtrend. There is also a price action called consolidation. Consolidation occurs when the market is trading sideways, which can be defined when the price is oscillating in a horizontal channel that is neither predominantly up nor down.
Is a Trend Trading Right for you?
If you are committed to the long game, then exploring the trend trading strategy might be right for you. Keep in mind that you will be holding onto positions longer, so patience is required.
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