Trend trading is one of the most popular trading strategies used by beginners and professional traders. It’s simple approach, consistent results, and broad application make it ideal for all kinds of financial market trading. This article will tell you all you need to know about trend trading strategies as a beginner. We’ll also show you some indicators you need for crypto trading techniques analyzing market trends.
What is Trend Trading?
Trend trading is identifying and using market momentum to make trading decisions. It is based on the idea that market movements often move in a trend that may be sustained over a short or long duration. The trader uses this approach to spot current market trends and use the trends to predict the future price of the asset.
Although many consider trend trading suitable for mid to long-term trading, it can be applied to all timeframes. Even scalpers can use trend trading strategies to make quick market decisions. Long-term investors and traders typically apply trend trading strategies by analyzing the asset’s historical trends and price movements.
How to Identify a Trend
The most important aspect of trend trading is identifying the trend early and exiting before the trend reverses. To do this, consider the asset’s opening, closing, and current price range. The timeframe you’re trading with will help you determine the prices for your analysis.
There are three types of trends that you can use when applying trend trading strategies. These are
- Uptrends
- Downtrends
- Sideways trends.
Uptrends
The market is in an uptrend when the asset price increases. The uptrend favors a trader seeking to enter a long position on the asset. The uptrend continues for as long as the asset’s price keeps increasing.
Downtrends
If the price of the asset is decreasing, then the market is in a downtrend. The downtrend often happens as a reversal of the uptrend and favors traders looking to enter a short position on the asset.
Sideways Trend
There are situations in which the market maintains an almost parallel movement such that there is no significant increase or decrease in market price.
When this happens, the market enters a sideways trend. Sideway trends rarely benefit trend traders, but they are often lucrative opportunities for scalpers and range traders.
Three Leading Trend Indicators for Trend Trading Strategies
Indicators are trading tools that traders use to identify potential profit opportunities that align with their trading strategies. Many indicators can be used to identify uptrends, downtrends, and sideways trends. The most popular trend trading technical indicators are
- Moving average
- Relative strength index (RSI)
- Average directional index (ADX)
Moving Average Trend Indicator
Traders use the moving average (MA) indicator to find the average price of an asset over a given timeframe. Many options exist, but most traders prefer the 50-day and 200-day moving averages.
The major limitation of MA indicators is that they are lagging indicators. As such, trend traders cannot use them to predict future trends. However, they offer enough information that traders can use to detect if the market trend is moving up, down, or sideways.
Relative Strength Index (RSI) Trend Indicator
Traders use the relative strength index (RSI) indicator to determine if the market is overbought or oversold. If the market is overbought, they will expect the market price to drop. If the market is oversold, they will expect the market price to increase.
The RSI indicates market conditions in percentage on a scale between zero and 100. The market is overbought when the scale goes above 70 and oversold when it drops below 30. The drawback is that while the RSI provides insight into market conditions, it doesn’t provide a timeframe for price reversal. As such, the market can stay overbought or oversold for a long time. While this is not an issue for position traders, it is discouraging for scalpers. As such, it has to be used in conjunction with other indicators.
Average Directional Index (ADX) Trend Indicator
Traders use the average directional index (ADX) to determine the strength of a trend. The ADX fluctuates on a scale from zero to 100. Values below 25 indicate a weak trend, while values from 25 to 100 indicate a strong trend. The higher the number on the scale, the stronger the trend is.
The ADX is a good measurement of the sustainability of a trend as it helps the trader decide whether to use or ignore the trend.
However, it doesn’t always catch every trend, so it has to be used in conjunction with other indicators.
How to Start Trend Trading
Here are the steps to help you begin trading using trend trading strategies and indicators
Open an Account
You can open a trading account with IQCent quickly and easily. The minimum initial deposit requirement is only $20. You can also practice trend trading strategies in a risk-free environment with the free demo account offered to all clients.
Choose a Market to Trade
Trend trading can be applied to all markets. However, if you start trading for the first time, you should focus on one specific market. Once you’ve mastered that, you can apply your knowledge and experience to other markets.
Implement a Risk Management Strategy
Although trend trading offers consistent results, it is not error-proof. As such, use risk management tools and strategies such as stops and limits to protect your trades. You should also avoid investing all your funds into a single trade.
Conclusion
Trend trading involves using technical indicators to identify the direction of market momentum. It can be applied to all timeframes in all trading markets. With consistent practice, sound trading strategies, and risk management techniques, it can become a great way to make profitable trades.
