What Is Trend Trading Strategy

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What is trend trading?
Trend trading is a strategy that involves identifying market momentum using technical indicators. It is based entirely on the idea that markets are predictable, and that a trader can forecast what will happen in the future by analyzing historical trends and price movements.

Trend trading is often thought of as a selected medium- to the long-term trading method, however, depending on how long the trend lasts, it can theoretically cover any timeframe. Traders that like a position trading or swing trading approach are likely to use it. Swing traders recognise a trend and ride it from start to finish, whereas position traders would maintain a trade for the duration of the prevailing trend, ignoring day-to-day changes.

How to identify a trend

Trend trading techniques are intended to assist you in identifying trends as early as possible and exiting the market before the trend reverses. The opening and closing prices, as well as the trading range of each individual candle, offer traders with a lot of data that may be ...
... used to determine the trend's ebb and flow.

Broadly categorizing, there are three types of primary trend: uptrends, downtrends and sideways trends.
A trader seeking to profit from these movements would enter a long position especially when the market is reaching increasingly high price levels. Consider the example, if a company's share price increases by 100p, then declines by 50p, then rises by 110p and falls by 40p, it would be said to be in an uptrend because it is making higher highs and higher lows.

A market price is considered to be in a downtrend when it is declining in value. When the asset is falling to a lower price point, a trend trader would establish a short position. A downtrend occurs when the price of a stock falls by 200p, then rises by 100p, falls again by 300p, then rises again by 50p. This is due to the fact that it is dropping to lower lows and higher highs.
A market price is said to be in a sideways trend when it does not hit higher or lower price points.

Most trend traders would ignore these patterns, but range traders and scalpers, who aim to profit from extremely short-term market moves, will be on the lookout for them.

Three top trend indicators
Traders have devised a number of methods for identifying primary trends, including observing price activity, but the most frequent trend trading systems rely on technical indicators. The following are some of the most often used trend trading indicators:
1. Moving average
2.Relative strength index (RSI)
3.Average directional index (ADX)

Moving average trend indicator
A moving average (MA) indicator, as the name suggests, finds the average price of an asset over a particular duration. This produces a smoothing effect on the price data, resulting in a single line that can assist traders in identifying trends. Popular options include the 50-day and 200-day moving averages, although the final decision will be made by the individual.
Moving averages are lagging indicators, meaning they move behind the market price. This means that MAs can't anticipate future patterns, but they can tell you what happened in the past. The direction of an MA can assist confirm whether the market is trending up, down, or sideways, which is particularly important for trend traders.

A trader would focus on whether the given price is above or below the MA while looking down at a single moving average. An uptrend is indicated by a price that is above the moving average, while a downtrend is shown by a price that is below the moving average.
Looking for crossovers between two moving averages, on the other hand, is a typical moving average approach that can signify a price direction change. Normally, two exponential moving averages (EMA) would be used: one fast EMA and one slow EMA. The fast EMA (blue line) in the example below spans a nine-day period, while the slow EMA (red line) is set to a 14-day timeframe.

When the fast EMA crosses the slow going EMA from below, a trend trader would establish a long position, and when the fast EMA crosses the slow EMA from above, a trend trader would enter a short position.

Relative strength index (RSI) trend indicator
The relative strength index, long for (RSI) is a tool for detecting price momentum and overbought or oversold indications. It accomplishes so by examining average gains and losses over a set number of periods - usually 14, and determining whether there were more positive or negative price changes.

The RSI is expressed as a percentage that ranges from zero to one hundred. The market is said to be ‘overbought' when the indicator rises above 70, and it is said to be ‘oversold' when it falls below 30. These levels are used by traders as prompt signals that the trend might be reaching its maturity.

It's important to remember that the market can be overbought or oversold for a long time. Because the RSI only fluctuates between zero and 100, the market price might range across a considerably broader range of values, the RSI is not always an indicator for an imminent change in trend.

A trend trader in the long position will usually use the overbought signal as a price point to lock in their profit and exit their trade, while a trader looking to open a short position will use the overbought signal as an entry point. Trend traders using the oversold signal will do the opposite: they will use the oversold signal to exit short trades and enter long trades.

Average directional index (ADX) trend indicator
Traders use the average directional index (ADX) to assess the strength of a trend, whether it is up or down. On a scale of zero to one hundred, the ADX line varies. Values between 25 and 100 indicate a strong trend, with strength increasing as the numbers increase, whereas values below 25 suggest a weak trend.

The directional movement index (DMI), which is made up of two other lines: the negative directional indicator (-DI) and the positive directional indicator (+DI), is frequently drawn in the same window as the ADX. The ADX line indicates the trend's strength, while the other two lines indicate the trend's direction.

If the given scenario that is +DI crosses the -DI while the ADX is still above 25, it's an indication that an uptrend is likely to begin, and traders should consider going long. When the -DI crosses above the +DI while the ADX is above 25, it is considered an indication that a downtrend is about to begin, and a short position might be taken.
The aforementioned indicators won't catch every single trend 100 percent of the time, but they can be used to filter out markets that aren't trending or are trending weakly.
An effective trend trading strategy includes more than just technical analysis. Even the best trading method won't make you money in the long term if you don't prepare properly and manage your risks.

How to start trend trading
1. Create a user account. You can quickly and easily create an IG account
2. Use a demo account to practice trading. With an IG demo account, you can practice trend trading in a risk-free environment.
Alternatively, you can learn more about financial markets by enrolling in IG Academy.
Before you begin trend trading, there are two more important procedures to take:
Choose a market to trade
It's critical to have a clear notion of what you want to trade before you open a position. While some trend traders prefer to concentrate their efforts on a single market, others spread their bets across multiple markets, obtaining exposure to a wider range of patterns.
Once you've determined what you want to trade, you'll need to stay on top of any changes that could lead to new trends or countertrends. Breaking news, central bank policy pronouncements, and political events are examples.

Conclusion

To safeguard their bets, most trend traders will use both stops and limits. Limit close orders allow traders to lock in a profit by exiting a position at a more favorable market price. Stop-losses, on the other hand, will close a position out if the market swings against it by a certain amount. Because trend reversals can occur at any time, having a risk management strategy in place is critical.