Trend trading strategies are very valuable as a trader. The term the trend is your friend is fitting when trading stocks. Knowing how to identify the trend is very important because it gives important clues for entries and exits when trading. You draw trendlines on a chart by connecting at least 2-3 pivot points on either support and resistance levels or both, depending on whether you’re drawing rising wedge, falling wedge channels, or just trying to identify the overall trend.
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What Are Trend Trading Strategies?
Did you know that trend trading strategies are important to know as a trader? Trend trading is finding momentum and trying to profit from it. You’ve probably heard the saying “the trend is your friend”. It’s true. The foundation of the stock market is the fight between the bull and the bears.
That war causes trends to occur. When one side is winning a battle, a trend is in place. However, no one wins the war so the tides will change. The market trades in cycles.
What goes up will come down again. Using trend trading strategies allows traders to profit during a trend or when a new one begins.
Trend trading strategies can be used for ant style of trading; day trading, swing trading or long term investing. No matter what style you prefer, trend trading strategies work.
Trend trading strategies work whether you’re going long vs short. If a stock is making higher highs, trend traders would open a long position or buy call options.
However, if a stock is making lower lows, a trend trader would open a short position or buy or sell put options. Read our post on calls and puts.
Trend trading strategies believe that a stock is going to continue in its current trend. Apart of trend trading is applying risk management. Trends cannot continue forever so you need to have a profit target and stop loss in place.
Keep a look out for reversal patterns and/or signals. However remember that small reversals can take place all the time. Depending on your strategy, wait to close out a trade until there’s confirmation the trend has in fact reversed.
Moving average lines are just one of the trend trading strategies you can use. They filter out the noise. However they are lagging indicators.
Lagging indicators are formed or past price movements. Although moving averages can play pretty important roles.
Moving averages can act as support and resistance as well as equilibrium. When price moves away from the moving average lines, it’s going to gravitate back towards them.
Crossovers, which include, moving average line crosses or price crosses are important trend trading strategies. If price crosses above the moving average lines, it’s seen as bullish.
However, if price crosses below moving average lines, it’s a bearish signal. As a result, those lines become key support and resistance levels.
Moving average crossovers are seen as important buy and sell signals. When the short term line crosses above the long term line, bullish positions are taken.
Likewise, when the long term line crosses above the short term line, bearish position are taken. The 50 and 200 SMA crossovers are some of the most popular and widely used.
The 9 and 20 crossovers are also important to pay attention to. Especially when day trading. Price tends to ride the 9 and once it goes below, it’s a sign to get out.
Trend trading strategies that use momentum indicators tell you when a reversal is coming. The RSI is the most popular indicator used.
The RSI tells traders when a stock is overbought, oversold or confirms the strength of a trend. The belief that an overextended price is going to change directions is confirmed with RSI.
Usually with small cap stocks, this is true. If the chart is overextended a reversal typically occurs. However, on higher priced stocks this isn’t always the case.
This is where you’d use RSI to confirm the strength of the trend. You may notice on the higher priced stocks that the RSI stays overbought or oversold for a longer period of time.
This is just confirmation that a strong trend is in place. However, it should also make you very aware that it’s going to pullback and correct.
That move can either be just a pullback before continuing in the trend or a reversal of the trend in place. This is why other indicators are necessary.
How Do You Trade a Trend?
- Here’s are some popular strategies to trade a trend:
- Connect at least 2-3 peaks and valleys using trend lines
- Do this in both up trends and down trends
- In an up trend, look to go long near support levels
- In a down trend, look to go short at resistance levels
- Candlestick patterns are most important trend indicator
- Look for reversal patterns nears support levels
- Look for reversal patterns at resistance levels
- Watch moving average lines for support and resistance
- Volume is also very important when determining entries and exits
Reversal Patterns and Trend Lines
Trend trading strategies like reversal patterns and trend lines are so important. One could even argue they’re the most important strategy to know.
Candlesticks by themselves tell a story as well as provide support and resistance. When grouped together they form patterns. Reversal patterns like tweezer tops or morning star patterns are pretty important patterns to know. Patterns coupled with other trend trading strategies like moving averages or momentum indicators give the big picture.
Add trend lines to that and you can see the current trend in place. Being able to draw trend lines is a good skill to have. They provide angular support and resistance.
A breakout or or breakdown out of trend lines confirms a new trend and a new place to enter a trade.
Trend trading strategies are a great way to grow your brokerage account. It will take time since you have to study and learn patterns. However it’s an invaluable skill to have.
If you need more help, take our swing trading course.