We receive many requests regarding what is trend trading in the forex market and what indicators a trader should use for trend trading. In this iconic article, we will explain to you about trend trading, including what is trend trading and how you can make a profit from implementing a trend trading strategy.
28 April, 2020, | AtoZ Markets – As we know, traders should have a trading strategy to make a profit from forex, cryptocurrency, or the stock market. Most of the trading strategy can be divided into two categories- Trend trading and counter-trend trading.
Trend trading is a system to make trading decisions towards the current market direction. On the other hand, the counter trading strategy relies on the hope that the opposite party might reverse current market conditions.
Trend trading in the forex market is a very profitable and famous system of trading among traders. There are a lot of successful traders who have made an extensive amount of money by following trend trading strategies only.
What is Trend Trading?
The definition of trend trading is straightforward. Trend trading happens when a trader takes trading decisions based on market trends. More specifically, trend traders follow the direction of a trading instrument over time and evaluate those to market trends and other trading indicators based on technical and fundamental analysis.
Although the definition is simple, the concept of trend trading is more deep-rooted. Some trend trading strategies work well, while most of the strategy might confuse beginners. Therefore, it is crucial to set and follow specific limits and rules for trading. Overall, trend trading is a systematic approach to trading.
Answering “what is trend trading?” requires more information than merely a definition. A lot of information is necessary into trend analysis which includes the understanding of different trend lines.
Basics of Trend Trading
Becoming a success trend trader is more straightforward in case you recognize the fundamentals of how trend trading works. We have mounted that trend trading relies on knowledge of broad market trends. However, what styles of trends do trend traders generally use?
Not all trend traders are commodity traders, but trends for commodities are more uncomplicated to identify those trends. Investors who find trends anticipate them to hold when they determine to buy that inventory. For instance, a trader would have noticed a trend that has formed six months ago and established to monitor the price action. Once the trader noticed an uptrend in the instrument, they might have bought in hopes of the stocks continuing that trend. Each share has seen sharp upward spikes since the start of the year, so this would’ve been a strong play.
Finding shares likely to reveal an uptrend over six months or 12 months takes a sound system of locating trends. Understandably, the excellent trend traders are elite at determining trends in distinctive industries. This is where it helps to have a set of indicators that make you feel confident about your trend strategy.
On the other hand, in the currency market, trend trading is slightly different as it is volatile compared to the other market—the major market movers in the forex market work in the higher timeframe. Therefore, to understand them, traders need to go above a higher timeframe.
How to Identify the Market Trend?
Identifying trends is very crucial for a trend trading approach because all of the trading activity depends on the trading decision. Any failure to determine the trend correctly will affect the whole trading activity. There are several tools that we can use to identify the market trend:
- Moving averages are one of the crucial indicators for trend traders. It helps traders to eliminate fluctuations by focusing on an average, by representing the average price of the last number of candles. For example, 20 moving average on a daily time frame represents the average price of the previous 20 days. Therefore, if the price remains below the 20 MA, it means sellers are dominating the market for the last two days.
- MACD is another tool that helps to provide signals when traders should buy or sell a currency pair using two moving averages. It fluctuates from zero to a hundred, and traders use different points within these levels to predict the trend.
- The RSI moves within a zone from 0 to 100. The higher the level means the price is experiencing extreme buying pressure. So, if the RSI moves above 50, it could indicate that the price is overbought and due for a dip. On the other hand, a lower RSI means that the price is oversold and scheduled for an uptrend.
- Volume oscillator is another indicator that is used to confirm trends. It represents the volume of buying or selling pressure for a particular instrument. The higher the volume means market movers are keen to move the price for a specific direction.
Those four indicators are useful tools to help traders see trends in an instrument’s price. Besides understanding the market context, these tools are also helpful.
How to Start Trend Trading?
If you want to focus on taking a minimum number of trades with maximum benefits, trend trading in the forex market is the right way for you to start trading. This trading methodology reduces much of the risk that is associated with day trading.
Once trend trading provokes your interest, a plan of attack is essential. You need to research some of the common indicators and determine the ones that are best for your trading goals. Once you decide indicators, it is the time to flesh out the forex trading strategy. How many trades do you want to hold at one time? What would be the lot size for each position? How long will you keep the trading position?
These are ideas to set parameters and rules to follow during the trading process. At first, you need to make sure that you have a trend trading strategy that is profitable and that matches your personality.
Later on, to start trading, you will also need a trading platform. There are many forex trading platforms, including MT4, MT5, and cTrader. You can download them and test them with indicators without paying any fee.
Besides, generating and implementing a forex trading strategy, you should understand the trading psychology well. As trading includes a lot of pressure on your mind, influential psychology will help you to get rid of it.
Why is Trend Trading Profitable?
Trend trading does not need much time, whereas day trading requires monitoring daily fluctuations and different instruments. A trend trader can observe their trades in weeks, months, or even years too. For busy professionals, this is an ideal situation.
- It needs to perform some technical analysis. Therefore, you can implement trend trading strategies, but it does not require the same daily grind that day traders go through. Additionally, trend trading eliminates the emotion out of buying trading instruments. Some traders usually make decisions based on emotions or gut instinct. Trend trading decreases those human errors by focusing on technical data.
- Trend trading is less risky than day trading and allows you to focus on diversifying your portfolio. It can be an excellent way to trade if you are focusing on long-term success. This waiting reduces the effect of short-term volatility in the price.
- There are some other benefits to trend trading, especially if you can evaluate different indicators and know how to interpret them. You need to spend time interpreting data. Therefore, you should know how to explain these on a chart. Trend analysis is vital, but once you understand that, it will be an easy and straightforward process.
Trend trading in the forex market is when you follow a trend in a stock or currency pair’s price to determine your trading decisions. Most of the trend traders are successful in the industry. The trend trading strategy decreases trading emotions by putting technical analysis at the forefront of the decision-making process.
On the other hand, whatever forex trading strategy you use, it will not guarantee of 100% profit. You need to identify the strength and weakness of the forex trading strategy. Therefore, you should have good trading psychology with money management skills to increase the possibility to be successful in the industry.
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