Trend traders have a scientific attitude to the extraction of profits from market trends. They are concerned with identifying and segregating profits from trends. The tradable asset’s momentum in a given direction is the object of study. There are a number of ways in which this analysis might be performed. Trend trading strategies are proficient in trading psychology and risk management. Analysing a number of market indicators in the furtherance of a trader’s profit extraction goal is possible through a handful of analytical tools.
We run through the following methods and associated indicators:
- Trend riding with the main trend line adjustment;
- a channel for trend trading strategies following;
- Moving Averages;
Trend riding with main trend line adjustment:
Volatility makes this a considerable challenge in the forex market. Trends are made visible only by drawing a line. Hence, ‘trend line’. Drawing the trend line as the trend develops is the challenge.
You can only go step by step while planning your strategy. Typically, the trend grows in three stages.
Stage One – The absolute high is connected with a lower high. When the previous support collapses, the trend start is confirmed. When the support changes to resistance, it is imperative that the price action is not close to the trend line (at this point in time).
Stage Two – When the price action pierces the trend line but does not close above it, the point obtained can be taken as a reference point for going short. You can then adjust the main trend line to the new spike.
Both dynamic and classic resistance now experience selling;
Stage Three – The process is to be repeated for as long as the price fails to close above the trend line. Once the market makes a newer low, the trend line adjusts to the foregoing swing high.
The end of the trend is marked by the market closing above the adjusted trend line. It is not necessary that the price starts a trend after the trend line is broken. A consolidation period might begin, even as the old trend keeps going.
A Channel for following Trend Trading Strategies:
Despite the market breaking dynamic support and resistance, trend channelling remains unaffected. In a bearish channel, many traders buy the lower edge and sell the upper one. The next thing is to look out for breakouts. The Bollinger bands indicators are predicated upon this concept. A well-known property is that the price may stay inside of the two bands, but not all of the time. When the price deviates from the Bollinger bands, it’s possibly the time to make a killing. When the price breaks out a tad bit, you can take the chance to go short or long.
Ironing out price data by creating an updated average price, the moving average is obtained. Getting rid of random price fluctuation variations, a moving average gives a flat line on a chart. Simple moving averages that last for 50, 100, or 200 days are the rage with long term trend followers. An uptrend is on the way when the moving average line is at an upward angle. You may also wish to use moving averages by way of crossovers.
You can have a buy signal when the price crosses above a moving average. Also, you have a sell signal when the price crosses below a moving average. The weakness of support or resistance is inversely proportional to the frequency of the testing of moving averages by a price.
Trend followers tend to be orthodox. Oscillators make use of the fact that entries are in the overbought area. An oscillator can target the oversold asset once a stop is placed at a certain moving average (say, 200).
The moving price convergence & divergence is actually an oscillator. It varies within a band over a period of time. Besides being a trend following indicator, it is used as a momentum indicator as well. The MACD lines’ position with respect to zero in the histogram below the chart gives the MACD strategy for trend trade following.
When MACD lines are at an elevation above zero for a certain time period, there’s a likely uptrend in the offing. On the other hand, when the MACD lines lie below zero for a given period of time, the trend is almost definitely down. With this strategy’s aid, there are buy signals on the MACD moving above zero and sell signals on the MACD moving below zero.
Signals -You may use crossovers to receive buy or sell signals. We consider that MACD has a slow line and a fast line. On the fast line crossing through and above the slow line, a buy signal happens. On the fast line crossing through and below the slow line, you get a sell signal.
Relative Strength Index
The RSI is also an oscillator. Being as it is situated between zero and hundred, it gives data dissimilar to the way MACD does. When the price is overbought, the indicator lies above 70 on the histogram. When the indicator is below 30, the price is thought to be oversold. However, it is a bit too much to ask for signals to be available to traders more than now and then through this strategy.
On an uptrend, you can buy close to oversold conditions. On a downtrend occurring, you may place a short trade in the vicinity of an overbought condition.
We may consider the instance of an asset experiencing a long term uptrend. When the RSI moves below 50 and then above it, a buy signal can happen. Here is when we see that a price pullback has occurred. It’s upon the resumption of the trend that, as per RSI, pullback ends.
It is here that the trader buys. RSI generally does not reach 30 in an uptrend. That happens when the potential reversal is on its way. If the trend is down, a short trade signal occurs. RSI goes above 50, and then back beneath it.
On Balance Volume
The OBV is a single line indicator that absorbs a lot of volume information. OBV gives you cumulative buying and selling pressure. This is achieved by subtracting volume on down days and adding volume on up days. Ideally, OBV is directly proportional to the rising/falling price.
Why Are Trend Trading Strategies Better Than Fundamental Analysis?
There are traders who try to interpret the markets with the aid of fundamental analysis. They use macroeconomic parameters for determining buy and sell decisions. The fundamental analysis points out to us the big picture. You will recognise stories like “The time is right to buy Dow-Jones stocks”, “it’s not too late to profit from rally”, rise in nominal GDP”, “Rising energies and materials shares”, and the list could go on ad infinitum. In fact, there is a fervour for fundamental analysis that is somehow a bit misplaced.
Cause and Effect of Explanations
Traders yearn for cause and effect explanations. They delude themselves thinking there’s a deeper cause behind events. To give too much credence to the need for that ‘ultimate explanation’, however, is folly. It comes as a little surprise that fundamental analysis gives no ultimate cause for market events.
Discipline in Trend Trading
Trend-following trading is entirely dissimilar to fundamental analysis. Trend following trading does not forecast market direction. Wild emotions and guessing alike are an anathema to the trend trading strategist. Trend trading strategies follow a set of rules. You need to discipline yourself to apply these rules to market conditions to determine your own moves in the immediate future.
Trend Trading and Risk Management
Trend trading strategies are concerned with a type of risk management that deploys the current market price and your account equity level for analysis, with market volatility factored in.
Towards the determination of entry trading size, trend traders employ an initial risk rule. You have an exact inkling of your equity, and you are well aware of the volume you want to buy or sell. The initial trade may be aided or hampered by price fluctuation. Conversely, an exit faces adverse price movements. Small wonder that the average loss per trade is lower than the average profit per trade.
Trend trading strategies seek to grasp the essence of a market trend – be it up or down. There will be neither absolute loss nor absolute profit. Trend trading strategies go for the entire gamut of tradable assets right across the board. They are all open to trend trading analysis, be they instruments, LEAPS options, bonds, futures, currencies, commodities, ETFs, and stocks.
All you need is price data.
The Here and Now, Rather Than Forecasting
Put your faith in your grasp of the here and now, rather than trying to plan for the future well in advance. Here, trend trading strategies serve us really well. Trend trading strategists are not in the forecasting business. Rather, they react to markets as they unfold. There is an established number of ways in which that reaction should go about. And there’s no call for us to go looking for second sight. There’s no call for fear of market flux.
Market In Flux
The markets are in constant motion. There’s only so much you need to do for the ebb and flow of the sea. The same holds good for the markets. A minor advantage, when in conjunction with cognisance of probabilities, can make you wealthy.
This is true for casinos and also for forex and securities markets. However, for you to maintain a grip on your upwardly mobile momentum, it takes a bit of work. The trend trader knows how big the actual picture is but remains collected in the face of surprises. It turns out; all surprises are not nasty.
What Is Measurable, Matters
Measurement is the pith of the matter. Concern yourself with all that can be measured. The change is important only insofar as it can be measured. And trend trading strategists are past masters at measuring changes in the course of the trading day affecting markets.
All Trend Trading Strategies Hinge Upon Price
Price is an entirely objective bit of information. Irrespective of where the market is located, all you need is price histories. And you are all set. Price can only go up or down or undergo minuscule changes edgeways. There’s no practical need to know the future. Let academics deal with that. The trend trading strategist is concerned with the here and now.
Getting Started In Trend Trading
As mentioned above, there are a number of rules to be followed (rather rigorously) for you to make it in trend. You can start just by answering the following inquiries:
- At a particular point in time, what market do you wish to buy or sell? ;
- When would it be right for you to buy or sell a market? ;
- How much of that market do you intend to buy or sell? ;
- When do you exit a losing position? ;
- When do you exit a winning position?
As a trader when you, buy an asset, you wait to see if a trend follows. Once the trend is on its way, you jump onto the bandwagon and try to determine the point at which you can profit by selling the asset at a higher price.
You want to be a systematic manager who follows mathematical models of ‘market behaviour’ rather than a discretionary manager. The latter is known for applying intuition to his/her analysis.
A trend trader tries to identify developing price patterns, trading in trend direction when that eventuates.
Delimiting a trend
A general tendency in a data set is a trend. Comparing historical against current measurements gives the values for the trend. You have an up-trend when the current reading is higher than the historical reading.
You have a downtrend when the same is lower. It is rare when a sideways trend is obtained, wherein the values are the same on both sides. The methods and tools of analysis determine the interpretation of the market direction.
We are fortunate to have a veritable treasure trove of historical points to arrive at the trend after calculations. Strange as it may sound – the trend direction is determined by the methods and tools used.
Their current position and perspective impact the choice of instruments and methods traders use. The methods just measure the combinations of the same historical price points.
The metaphysical moorings of trends
The trends are not in the present. Rather, they are historical. When we say some asset is the current trend, we are imposing our perspective on the situation. Like motion and velocity, the trend does not exist in the now. Keeping this in mind, it becomes possible for us to compute and utilise trends.
By nature, the trend following is reactive. Here, there’s neither prediction nor forecasting. Trend trading strategy calculations require self-discipline and the application of a set of exact rules. These are concerned with a risk management system based upon current market price, your account’s equity, and prevailing market volatility.
An initial risk rule gives the entry position size. Now you have the exact amount you need to either buy or sell. Price fluctuations may cause a waning or waxing of the initial trade. Conversely, adverse price movements may cause a trade exit.
Trend trading-important facets
We enumerate below the important aspects of trend trade following:
Profit in a changing market: Trend trade following owes neither bull nor bear markets or anything like that. It is solely concerned with following trends to the finish line. The important thing is to persevere and not lose momentum.
The trend might make an appearance very early on. Also, they might give the appearance of being ludicrously extended. However, your stamina and self-confidence are vital to seeing your way through to profit in the changing market.
Neither buy & hold, nor news trading: Trend following decision making is not predicated upon guesses, discretion, hunches or gut feelings. It is not day trading; neither is it buy and optimism.
Trend following decision making is not concerned with within and out trading, passive indexing, or even fundamental analysis. Learn to ignore sensational hype. There’s neither magic nor magical thinking. Only self-discipline and science;
Neither forecasting nor prediction: You can react to market trends. There’s no predicting them. Trend trading does not pretend to know the beginning or end of a trend. Trend trading registers only when trend changes occur;
Let the leash off of profits: Compounding absolute returns gives the best of trend following. Opportunity targets are another priority with tend trading strategies;
Risk management is everything: There are always certain protocols to protect your account from harm. Leverage usage and stop losses are utilised to keep your trading safe. This trading has negative and low correlations with other investment events;
Mass psychology for influence: Trend following has its eyes peeled for sheep-like panic-stricken behaviour. Behavioural biases might be other traders’ thing, but not the trend trader’s. Trend trading strategies lend you the equilibrium so that you are equidistant from the awe of both profit and loss.
Since rational self-discipline forms the basis of all that you do, you (as the trend follower) do not follow the sheep. Many traders desire confirmation biases and indulge in wishful thinking. You are poised to win because you ignore the herd;
Logical trading: You follow immutable rules grounded in mathematics. You are interested in the process. The result of the process does not concern you. It matters that when you are right, you are so in a huge proportion. Any number of small losses does not fret your nerves;
Tried and tested in crisis situations: Time and again, trend trading strategies and trend following have kept adherents in the winner’s position. Uncertainty and fluctuating volatility inspire the trend follower. The more of those, the merrier! Learn to ride out the storm! ;
Fit for all manner of the market: The tenets of trend trading are good everywhere. Price action being the primary focus of trend following, the techniques are equally productive, no matter which market you are in;
Free of big brother government: Be free of interest rate manipulations. Grounded in solid principles, as a trend trading strategist, you simply cannot lose.
Trend trading strategies are put to work through the agency of indicators that permit price data simplification. Besides, these indicators are also great at reversal warnings and trend trade signals. Trend trade strategies work in all time frames. Their variables make them truly universal, and they find compatibility with the majority of the trend followers’ objectives.
Since the strategies are very reliable guides to trend trading plans, we understand that entry/exit criteria are pretty straightforward. ABinvesting can help you test out the various strategies before you go live.