A trend is the general direction that a market or price of an asset seems to follow. It could be short term or long term. Trend trading is a strategy where by a trader places the trades in the direction of the long term or short term trade. Long positions are taken when there’s an uptrend and short positions are taken where there’s a downtrend. As a good trader, you should always know that the trend is your friend. Following the trend is one of the best ways to predict the future movement of an asset or a currency pair. You should be very careful when placing the trades that are against the direction of the general trend, unless you are very sure that a reversal is about to happen. Trending markets are important concepts in technical analysis as well as fundamental analysis. These trends occur with some regularity and some degree of accuracy and predictability. However, the ability to discern these trends hugely impacts the investment returns realized.
Normally, when trend trading, you should wait for rebounds to get a good entry. Indicators such as moving averages come in handy when it comes to getting good entries and looking for rebounds. It’s always advisable to use at least 2 moving averages. For long positions, the moving average for the shorter period should be above the longer period moving average. For short positions, the shorter period moving average should be below the longer period moving average. The price should be above both moving averages for the buy signals to be valid and below the two moving averages for the sell signals to be valid.
But how do you determine the overall trend of an asset? 200 period moving average is an indicator that has been widely used in technical analysis to determine the overall direction of the trend. There is an uptrend when price is above the moving average and a downtrend when price is below the moving average. Another indicator that is widely used to determine the trend is dynamic trend on period 200. Some technical analysts argue that it’s more accurate than the moving average when determining the trend since it’s more sensitive to price changes.
After getting a good entry, a trader can use different approaches to determine the take profit and stop loss levels to use. However, regardless of the approach used, a good risk to reward ratio is paramount. For instance one can use the ATR to determine the take profit level then derive the stop loss level to use depending on the risk to reward ratio employed. Another approach is to place the stop loss on the previous swing low/swing high, then calculate the take profit level using the risk to reward ratio employed.
Sometimes, a rebound is mistaken for a reversal and so it’s always advisable to trade using a stop loss. If what you thought was a rebound turns out to be a reversal, take the loss and wait for tomorrow. Also, watch many assets/pairs so that you always have a possibility of finding a good set up.