Trend trading is often considered to be the safest and easiest way of trading. A trend is formed when the prices start to move upward or downward in a steady fashion. Once a trend has been established, it is very easy to identify it on charts when you see a steady upward or downward bias in prices. A trend may last from a few weeks to months.
Your objective as a trend trader is to identify a trend and to stay with it while the trend stays. A trend can be long term and highly profitable. Trend trading is designed to capture the capital appreciation that comes with the steady rise in the prices.
Trends can be fast. What this means is that price increase is fast. Trends can be slow meaning the prices increase in a steady but slow manner. A trend can be short term, medium term or long term. A short term trend can last from a few days to a few weeks. A medium term trend can last for several months. Now, a trend can last for years like that in the gold market. Now, a stable trend has low volatility with daily price range almost constant superimposed on a steady price increase. However, when the prices start to show increased volatility with the daily ranges expanding, it is an indication that the trend is becoming unstable and something is about to change.
Trend trading is often defined by the way the current short term average price is consistently greater than long term average price. Trend trading can be extremely profitable but the problem is often with the delayed entry and exit. The entry signal comes when the trend has started and the exit signal is also delayed when the trend had already ended with a sharp price downturn.
Now, you can understand the importance of identifying the trend in real time. This time lag between the start of the trend and the entry is not good. Similarly the time lag between the reversal of the trend and your exit is dangerous as price tend to climb slow but when the fall they fall like a rock with a sudden drop in the prices taking place within a short time. So delayed exit is more dangerous as compared to delayed entry.
Now, many people try to enter at the very start of the trend, ride it till it’s very end and find themselves losing all accumulated profits. Now, greed is always one of the most dangerous emotions that trader have to learn how to deal with. Good traders learn overtime to ride only a section of the trend. They happily do so without having any regrets about leaving profits on the table. This trend trading technique is known as, “Walking a mile with the crowd.” In trend trading, you need to know what the best indicators that can accurately predict a trend. You also need to learn how to use the stop loss. A particular stop loss strategy is highly successful for trend trading that you need to master!