What are trend trading strategies?
Trend trading strategies are probably the most popular strategy style among traders and investors. In fact, many fund managers choose to employ this type of method for its ability to provide high reward to risk ratio trading opportunities. Let's have a look at them in more detail.
What are trend trading strategies?
Trend trading is the process of analysing the directional momentum of a market and finding a way to participate in the move. The key to the strategy is the fact that once a market starts to move in a certain direction, other market participants will also join in. This is known as 'herd mentality.'
Trends can develop on any time frame with traders using short term trend trading strategies and investors using longer term trend strategies. Most trend traders will have a longer holding period based on the time frame they are using as the key is to try and capitalise on the majority of the trend. Other traders such as momentum traders will typically trade in and out of a trend, rather than have one position to capitalise on the whole trend.
Before we look at the different types of trend strategies available, the markets they can be traded on and some of the best technical indicators to identify a trending market, it is important to have the right trading platform to analyse such conditions.
Did you know that you can download the MetaTrader 5 trading platform provided by Admirals completely FREE? With this trading platform, you can trade on multiple asset classes and trade directly from the chart when you find a good trend to participate in.
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The different types of trend strategies
There are a variety of different types of trend trading strategies available which cover different time frames and markets. For example, intraday trend trading strategies are popular with day traders who hold trades for minutes or hours.
However, trending strategies can also be employed by higher time frame traders who operate swing trading strategies and hold trades for several days. Trending strategies can also be employed over different markets as well:
- Stock trend trading strategies can be used to trade well-known publicly traded companies like Apple and Facebook.
- Futures trend trading strategies can be used to trade on commodity and index markets such as Cocoa, Sugar and the Dax 30 index.
- Trend trading strategies Forex based markets are also widely used due to the markets 24-hour opening time.
Some traders will also use certain types of technical analysis to identify the best trends. For example, finding successful trend channel strategies can help traders identify trends using technical analysis tools, rather than fundamental analysis. Let's have a look at a few of these markets and technical analysis tools in more detail below.
Day trading strategies
Day trading trend following strategies are popular among day traders who look to profit from lower time frames such as 1 minute, 5 minute, 15 minute and 30 minute charts. In this type of style, traders would aim to find markets that are likely to trend throughout the day but capitalise on the cycles that typically develop on the lower time frames during such conditions.
A popular indicator used to find such conditions are moving averages. This type of indicator helps traders to quickly identify the trend of a market by viewing its average price over different time periods. For example, a 5-period exponential moving average will show traders the average price over the last five periods, or bars on the chart. Day trading trend following traders will often use multiple moving averages showing the average trend over different periods, as shown below:
A chart of EURNZD showing the 20, 50 and 100 period exponential moving average taken from the MetaTrader 5 trading platform.
Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
In the chart above each bar represents 15 minutes worth of trading, a time rame often used by day traders. Three different moving averages have been plotted against its price. These are the 20 (blue), 50 (red) and 100 (orange) exponential moving averages. Day traders will often wait for moving averages to angle in the direction of the trend and fan apart from each other to confirm the trend.
Technical indicators give a quick visual clue on the possibility of a trend and traders would often analyse price cycles as well.
- In up trending markets, the price often exhibits a pattern of higher high and higher low cycle formations, as shown in the chart above.
- In down trending markets, the price often exhibits a pattern of lower low and lower high cycle formations.
While the combination of moving averages and cycles can be employed by day traders, they can also be used for higher time frame traders or investors as well.
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Higher time frame trend trading
When using trend strategies on the higher time frames, many traders will look towards the stock market. This is because if a publicly-traded company is successful it will attract more people towards owning its stock, thereby providing the potential for a long term trend following chart.
For example, the monthly chart below of Apple's share price shows a strong trend over many years. The same moving average combinations were used in the previous example to identify a trend on the 15-minute chart.
Source: Admirals MetaTrader 5, #AAPL, Monthly - Data range: 1 July 2006 to 10 August 2020. Please note: Past performance is not a reliable indicator of future results.
Some important questions to ask yourself when considering trend trading strategies include:
- What is your preferred trading style? Is it short-term such as day trading or longer-term using the higher time frames?
- What is your preferred market to operate in? Is it Forex, stocks, commodities, etc?
- Now that you've chosen your style and market, it's time to choose which technical tools you will use to help identify trend following instruments.
- Risk management is also a key component of any trading strategy. Your entry, stop-loss price and target should already be pre-determined by using technical analysis. Risk sizing is also very important as you don't want to risk too much that a few trades wipe out your account as trading the market will result in random winning and losing trades.
Why start trend trading with Admirals?
- You can trade with a well-established, reputable company that is authorised and regulated by the Financial Conduct Authority (FCA).
- Access the world's most popular trading platform called MetaTrader for PC, Mac, Web, Android and iOS operating systems so you can also trade on the go.
- Discover the power of upgrading your trading platform completely FREE to the Supreme Edition for actionable trading ideas on thousands of different markets.
- You can open a Trade.MT4 or Trade.MT5 trading account to trade via CFDs and potentially profit from both rising and falling markets.
One of the best ways to get started is to test drive the trading platform and practice your ideas and strategies in a virtual trading environment. Did you know that you can open a FREE demo trading account with Admirals? This means you can trade in a virtual trading environment until you are ready for a live account.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.