An introduction to trend trading talking points:
- What is trend trading
- How to identify a trending market
What is trend trading?
Trend trading is a strategy used by traders looking for opportunities when prices are moving in a clear direction, either increasing or decreasing at a rapid pace.
If prices have been rising consistently, making higher and higher lows, a distinct upward sloping trendline would appear on the price chart, representing a bull market.
USD/JPY in a long-term uptrend
Chart prepared with TradingView
USD/JPY in a strong uptrend
Similarly, if prices have been falling sharply for a prolonged period, making lower highs and lower lows, a downward sloping trendline would represent a bearish market.
EUR/USD in a short-term downtrend
Chart Prepared on TradingView
EUR/USD bear market
This is different to a rage trading strategy that focuses on trading during periods of consolidation.
Technical indicators for trend trading
Although trend trading can be an attractive strategy, it is important to know how to correctly identify a trending market.
This is where technical indicators and multiple-time frame analysis can come in handy.
To determine the current market conditions, technical analysts rely on charts to understand the price action.
By applying a few technical indicators to different time-frames, the trader may be able to get a clearer perspective of the short and long-term price action.
While hundreds of technical indicators are available on most trading platforms.
Two effective indicators that may be used for trend trading include:
Relative Strength Index (RSI) - The RSI is an indicator used to measure the momentum and strength of the trend and can be used to determine when prices may be reaching extreme levels of optimism (above 70) or pessimism (below 30).
Click here to learn how to use the RSI when trading bullish or bearish markets
Moving Averages (MA) – The MA is an indicator that tracks the price of an asset over a period of time. Although the simple MA calculation simply takes the total sum of the values divided by the number of data points, there are a series of moving averages that can help smooth out the effects of short-term fluctuations in price action.
Visit the Skilling blog to learn about the benefits of using the exponential moving average (EMA)
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Past performance does not guarantee or predict future performance. This article is offered for general information purposes only and does not constitute investment advice.
