Trend Trading: Definition And Effective Strategies
What Is Trend Trading?
Trend trading is a type of day trading strategy that is executed by finding an asset that is moving strongly in a certain direction and then trading in the direction of that trend. By waiting for the asset to pull back during the trend, you can take an entry with a small stop loss and ride the trend up to your target. It is best to trail your stop loss as the asset moves toward your target in order to lock in profits along the way.
This is a very effective trading strategy that can be used on any type of asset like the stock market, futures contracts, options contracts or crypto trading. When the asset is moving in an upwards trend, wait for it to drop a little and then take your entry, using a tight stop loss so you can limit your losses if the trend does not continue. If the asset is moving downwards, wait for it to come up a little and then take your entry. You can increase your chance of success by only taking entries on pullbacks that also line up with support and resistance levels, moving averages, or whatever other trading indicators you also like to use for confirmation of trades.
Trend Trading Strategies
Trading with the trend can be done in various ways, using various forms of technical analysis. You can use whatever types of trading indicators you prefer to identify the trend and help figure out which areas are decently safe pullback zones to enter your trade. Some of the most popular technical indicators and charting tools that people use to trade with the trend are moving averages, oscillators, price action, support and resistance, higher timeframe candles and trend lines. Let’s take a look at some examples of each type of trend trading strategy so you understand how to use it on your own. If you want a super easy way to trade with the trend, check out our guide on fill the gap stock trading strategies.
Moving Averages
Many day traders like to use moving averages to find areas where they think price will bounce and this is a very common practice when trend trading. The most commonly used lengths for moving averages with trend trading would be 50, 100 and 200. These lengths are giving you different averages of the price over the most recent length of bars such as the average price of the last 50 bars of price action. When price is holding above or below the 50, 100 and 200 moving averages, it is a strong trend. You should be looking to enter your trade when price pulls back and bounces off of the 50, 100 or 200 moving average and then place your stop loss just beyond the 2 most recent pivot points.
If you get volume spikes during that bounce off of the moving average, that is a good sign that many other traders are also entering their position at the same level so it may be a good place to enter, but just remember that sometimes the trend will reverse even if everything looks great, so keep a tight stop loss in place so that you limit your losses. You should also try to let your winners run as far as you can so that you maximize your profits. Maximizing profits and limiting losses is key for any day trading strategy, but trend trading is a great way to do this because you can keep a tight stop loss if you are in a strong trend.
The key to making this strategy work for you is making sure that you are only trading when the trend is well established and very strong. If there are a lot of levels nearby that will act as support or resistance, then it is likely that the price will be choppy and won’t be a strong, smooth trend which makes it much harder to be consistently profitable. So be sure to wait for strong trends and then be patient with your entries so you can get the best possible entry position and keep a tight stop loss. Lock in profits along the way as the asset moves in your direction so you don’t let a winner turn into a loser.
The moving average indicator shown in the example image above is called Combined Moving Averages + Squeeze & Volume Spike Signals.
Oscillators
Oscillators are indicators that calculate the up or down movement of the most recent candlesticks over a certain length of bars and then they show a curved line that moves up and down. Most oscillators have a midline which is typically 50 if the oscillator moves between 0 and 100 or for oscillators like momentum indicators, 0 is the midline because it moves beyond 100 and -100. When the oscillator is above the midline, it is bullish and when the oscillator is below the midline, it is bearish. Look for established trends on whatever asset you are trading and then wait for the oscillator to return to the midline and hold above it if an uptrend or below the midline if it is a downtrend and then enter the trade once it bounces off of the midline.
Once you get a bounce off of the midline, hold that trade until the oscillator reverses direction and then take your profits. This will help you get into trades at an optimal entry point by waiting for the oscillator to return to the midline and then maximize profits by exiting the trade once the oscillator gets to its peak and turns around. This is a very easy trend trading strategy you can use for all types of tradable assets and is also very effective at helping you identify when to enter and exit your trades.
The oscillator indicator shown in the example image above is called RSI Scalping & Swing Signals With Alerts.
Price Action
Price action trading is a very effective way to trade with the trend, but it is much harder to train your eye to detect these patterns efficiently than it is to use indicators like some of the other trend trading strategies that we have mentioned in this article. As with every other strategy for trend trading, you need to wait for a strong trend to be established. Once you have identified the trend, look for pullbacks that create higher highs and then a higher low than the most recent pivot if the trend is bullish. If the trend is bearish, look for a lower low and then a lower high than the most recent pivot and take your entry as close to the most recent pivot. As long as the pivot you are looking to enter on is a higher low for bullish trends or lower high for bearish trends, then go ahead and take your entry and place a stop loss just past the most recent pivot.
If the trend is actually strong, then it will respect the most recent pivot point and continue the trend once it makes a higher low for uptrends or a lower high for downtrends. Train your eye to spot this type of price action and you will eventually be able to spot these quite easily on the chart. This is one of my favorite ways to trade and also allows you to keep a very tight stop loss so you can keep your losses very small if the trend reversal happens to you, which is common if the trend is not very strong. If your pivot point also bounces off of a support and resistance level it can give you extra confluence to take the trade.
The biggest things you need to watch out for when trend trading with price action is market makers pushing price just past the most recent pivot point so they can take traders’ stop loss and then continue the trend. There are going to be short term, mid term and long term pivots that are on the chart. Short term pivots are likely to get taken out before the trend continues and sometimes even the mid term pivots will get taken out before it continues. But the long term pivots are going to be the most protected and the most likely to hold, so if you can, keep your stop loss just beyond the most recent long term pivot point so that you don’t get stopped out before the market continues the trend.
The price action indicator shown in the example image above is called Buy Sell Indicator.
Support And Resistance
If you are trend trading with support and resistance levels, you need to wait for price to break through the support or resistance level and then hold that level before entering the trade. So, if when the trend is bullish, wait for price to get above the next resistance level and then get support on top of it, then enter the trade, with a stop loss below the consolidation or bounce off of that level. If the trend is bearish, wait for price to get below your support level and stay there before entering and place your stop loss above that consolidation or retest of that level. Then look for price to move to the next support or resistance level and take profit slightly before price gets there because it won’t always make it to the next level.
This can be a little tricky sometimes as it can be very easy to jump into a trade and then have the price reverse on you even though it looked like it wanted to continue. Many times price will chop around and consolidate at these support and resistance levels, which can be difficult to determine if it wants to continue the trend or not. So be patient and wait for confirmation that price wants to continue the trend before entering the trade. And as always, trail your stop loss as price moves in your favor so you can lock in profits in case price decides to turn around before it hits your take profit level.
The support and resistance indicator shown in the example image above is called Supply And Demand.
Higher Time Frame Candles
When trend trading on lower time frames like the 1 minute chart or 5 minute chart, make sure to keep an eye on what the levels of the higher timeframe candles such as the hourly candles and daily candles. By levels, I mean the high, low, open and close levels of the most recent few candles. These levels will act as support and resistance and can give you excellent levels to enter on when the market is trending strongly. Many times the price will trend in one direction and then pull back to one of the hourly or daily candle levels and then bounce there and continue the trend. So by keeping an eye on these levels by using an indicator or marking them up on your charts manually, then you will always know where to pay attention so you can enter your trades on those pullbacks that bounce off of the higher time frame candle levels.
You can then place your stop loss just past the most recent pivot point as price should respect that pivot point if it is ready to continue the trend. Look for the next higher time frame candle level in the direction of the trend to take profits. As always, make sure to trail your stop loss with the price as it moves in your direction to lock in profits and prevent a winning trader from turning into a losing trade.
The higher time frame candle indicator shown in the example image above is called Supply And Demand.
Trend Lines
Trend lines are an extremely popular method of trend trading(especially for swing traders) as it makes it pretty easy to set up your charts with trend lines and see when price is bouncing off of those trend lines. For best results with trend lines, use higher timeframe charts such as hourly or daily charts and start your trend lines at the top or bottom pivot point and then set the second point on the next highest or lowest pivot in that direction. Use the line extend option to keep your line going past the second pivot and then wait for price to reach that trend line and reverse. Trade in the same direction of the overall trend and set your stop loss just beyond the pivot that touches the trend line. You can do this over and over again until the trend line is broken and then start the process over again but in the opposite direction since the trend has now switched directions.
In situations where price breaks the trend line, it will usually come back and retest the trend line breakout area before continuing past the trend line, so that is where you can get out of your trade at a small loss if you didn’t already have your stop loss hit. Trend lines can be tricky to work with on lower time frames because higher timeframe trend lines will always be more important, so make sure you are only using trend lines that are very clear on higher time frames to increase your win rate and be as profitable as possible.
The trend lines shown in the example image above are drawn using the trend line tool on Tradingview charts.
Putting It All Together
No matter what type of trend trading strategy you use, make sure you are being patient with your entries and waiting for confirmation of trend continuation before entering. Always use a stop loss and try to keep it just a few ticks past the pivot point that price makes at your reversal area so you can limit your losses. Always trail your stop loss as your trade becomes profitable so that you don’t let those profits slip away.
You can also use confluence by adding another trend trading indicator in there to help give yourself confidence in trades and confirm the trend continuation so you limit the number of times that you get into a trade as the trend decides to reverse as that can be very frustrating. The biggest thing to remember though, is always make sure the trend is established and strong, because otherwise, you will end up trading the trend just for price to reverse and chop around on you which is never fun for a day trader.