Trading with a trend is the most popular approach to trading in the financial markets. The trend trading strategy is very simple. If prices rise, the trader opens a buy trade. When prices fall, traders place a sell order. Trading with a trend is about determining the general direction of quotes and then joining a wave of higher highs or lower lows.
Let’s take a closer look at how to trade with the trend. First, you need to identify the trend using popular technical indicators. For example, using moving averages, Donchian channels, MACD, RSI.
The moving average shows you the average price over a period of time. Thanks to this indicator, you can analyze a company’s stock at the close of the stock market every day for a 10-day period. This will help you understand where the stock price closed each day and where the average price is heading.
The main purpose of the MACD is to signal a possible strengthening of trends. The RSI helps determine the strength of a trend. A higher relative strength index means that the stock is on a strong rally. However, if the RSI rises above 50, it could mean that the price is overbought and a fall is expected. A lower RSI may mean that the price is oversold and should rise.
Donchian Channels are designed to display the previous high or low of a selected market for a specific time. If the markets are making higher highs, the trend can be interpreted as an uptrend.
Trading on the trend becomes more accurate if you use several indicators at the same time.
Key principles of trend trading for beginners
Exchange trend trading can make a lot of money if you:
- identify the trend correctly;
- enter the deal at the right time;
- wait out the trend.
Trading on the trend should be carried out taking into account the following principles. Positions should be larger for less volatile markets. This can be accomplished in many different ways. Average True Range (ATR) can be used for this purpose. ATR measures the average daily price movement of the market. This can serve as an indicator of volatility. Set the target desired daily effect for each position. Then, calculate how many contracts you need to trade to achieve this based on the ATR.
Enter long positions if the 50-day moving average is above the 100-day moving average and vice versa. Enter long positions at a new 50-day high. Go with a breakout and follow the trend. Nothing more. Alerts are generated on daily close and next day trade.
Risk management of trend trading
Risk management must always be considered when implementing any strategy. Trading on the trend is no exception. Trend traders can use any number of methods to take profits as the market goes in their favor. For example, a trailing stop.
Consider using the previous low in an uptrend to set your initial stop and then steer your stop forward as new higher lows are created. Conversely, in a downtrend, set a stop above the previous high. Thus, when creating lower highs, it will be possible to trail your stop and take profit as the trend develops.