Trend Trading

There are a group of traders who specifically look for opportunities when a market momentum shows signs of trending in a specific direction – up (higher highs, higher lows) or down (lower highs, lower lows).

Typically, traders looking for a larger risk:reward ratio than that of day or swing traders. Perhaps looking to make as much as five times more than their potential risk on a trade. They can do this as they usually operate over a longer timeframe. For example, there was a weak dollar trend which lasted for the whole of 2017, and a sharp upward trend in equities which ran from November 2016 through to the end of January 2018.

Trend traders will take market fundamental into account, but not always. Typically technical analysis is of greater use for establishing the direction of the underlying trend and identifying significant areas of support and resistance. Specific technical indicators, such as the Relative Strength Indicator (RSI), Moving Average Convergence Divergence (MACD) and Commodity Channel Indicator (CCI) can highlight when a market is overbought or oversold. Moving average crossovers are also used to show when a market may be about to see a change of trend.

Drawing tools such as parallel trend lines and Andrews’ Pitchfork help show the direction of trend together with lines of support and resistance. Then overlays such as moving averages can help with confirmation. Traders use these to add to positions as prices bounce off support in an up trend or pull back from resistance in a downtrend.

There will be pauses for consolidation, typically shown by triangles, flags, pennants. But look out for reversals – typically double, triple tops/bottoms or head and shoulders/reverse head and shoulders.

Trend traders typically hold the underlying position until the main trend broken. But as with any trading style, diligent risk management is employed to ensure disciplined trading, help with trading consistency and to help remove emotion from the process.

  • BrokerEUR/USD
    IG 0.6pips (fixed) margin: 3.33%
    LCG 0.3pips (variable) margin: 3.33%
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