The beginner’s guide to trend trading

Trend trading is one of the basic concepts every trader should start with. The market moves in trends. Therefore, if you don’t know how to identify them, you won’t be able to trade successfully. 

Two commodity traders, Richard Dennis and Bill Eckhardt, debated over whether an average person can learn to trade. Mr. Eckhardt thought that only a genetically predisposed individual could become a successful trader as trading is an innate skill. Conversely, Mr. Dennis believed that trading is a usual skill that can be learned by anyone. Keep reading to confirm the opinion of Mr. Dennis. 

Trend: definition and types

A trend is an overall market direction that lasts for a considerable period of time. There are several categories the trend can be divided into. 

1. Direction 

When talking about trading and investing in common markets, including stocks, currencies, cryptocurrencies, and commodities, there are two major trend categories: uptrend and downtrend.

  • An uptrend is a situation in which an asset’s price rises, forming higher highs and higher lows. 
  • A downtrend is a market condition in which an asset’s price falls, forming lower highs and lower lows.    

2. Period 

The longer the timeframe, the stronger the trend is. Solid trends provide more reliable signals.

  • Short-term trend – despite the name, the short-term trend forms from several days to several weeks and occurs on a daily timeframe. At the same time, entry and exit points can be found on intraday charts, and trend confirmations can be determined on longer-term timeframes. Short-term trades are used by swing traders.
  • Medium-term trend – it forms from several weeks to a few months. This type is mostly used by position traders. They can use longer-term intervals for analyzing the price direction. Still, entry and exit points are usually determined on daily and weekly charts. 
  • Long-term trends – a long-term trend usually lasts for several months. It occurs on a monthly chart. However, traders use weekly and daily timeframes to identify entry and exit points. Long-term trend signals are rare. It’s worth mentioning that traders barely use long-term timeframes and trends to hold positions. They are mostly used by investors.   

How to trade trends

It’s easy to define a trend on the price chart by eye. If you see the price moving in the same direction for a considerable period, it’s a trend. Use a trendline to frame the trend. It’s a tool implemented on any trading platform. Connect highs and lows with the line so that you see the trend direction and its upper and lower bounds. 

The idea of trend trading is to buy within an uptrend and sell in a downtrend. 

Ways to trade a trend

There are scenarios on how to trade within a trend: buy on dips in an uptrend, sell on highs in a downtrend; trade on a trend continuation and a trend reversal. 

  • The first way is to trade within a trend. You can buy when the price touches the lower boundary (support) of the uptrend or sell when it touches an upper boundary (resistance) of a downtrend. However, you should be sure the trend will continue. 
  • You can open a position in the trend direction on a continuation signal. A strong trend includes periods of correction. The simplest way is to find a continuation chart pattern. You can also use technical indicators that provide signals on a trend direction, including Parabolic SAR, Moving Average, Bollinger Bands, and MACD.  
  • Another option is to trade on a trend reversal. It’s the most promising way of trading as it allows traders to enter the market at the early stages of trend formation. Here, you need to use reversal chart patterns and trend indicators that predict a trend reversal, including RSI, Stochastic, MACD, and Moving Average indicators. 

Takeaway

Trend trading provides numerous opportunities for traders. It’s one of the simplest and most effective approaches. If you learn how to identify trend correction, reversal, and continuation correctly, you will increase your chance of successful trades.

Disclaimer: No strategy can guarantee a 100% correct outcome of the trade.

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