Trend trading strategies are very valuable for a trader. The term the trend is your friend is fitting when trading stocks. Identifying the trend is 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 bulls 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 that 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 any trading style: 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 higher, trend traders would open a long position or buy call options.
However, if a stock makes 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 will continue in its current trend. Apart from trend trading, applying risk management is also important. Trends cannot continue forever, so you need to have a profit target and stop loss.
Keep an eye out for reversal patterns and signals. However, remember that small reversals can take place all the time. Depending on your strategy, wait to close out a trade until confirmation the trend has reversed.
Moving Averages
Moving average lines is 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. However, moving averages can play pretty important roles.
Moving averages can act as support and resistance as well as equilibrium. When the price moves away from the moving average lines, it will gravitate back toward them.
Crossovers include moving average line crosses or price crosses, which are important trend trading strategies. If the price exceeds the moving average lines, it’s bullish.
However, if the price crosses below the 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, bearish positions are taken when the long-term line crosses above the short-term linen. 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 nine; once it goes below, it’s a sign to get out.
Momentum Indicators
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 or oversold or confirms the strength of a trend. RSI confirms the belief that an overextended price will change direction.
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 trend’s strength. You may notice on the higher-priced stocks that the RSI stays overbought or oversold for longer.
This is just confirmation that a strong trend is in place. However, it should also make you aware that it will pullback and correct.
That move can be just a pullback before continuing the trend or a reversal of the trend. This is why other indicators are necessary.
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How Do You Trade a Trend?
- Here 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 downtrend, look to go short at resistance levels
- Candlestick patterns are the most important trend indicator
- Look for reversal patterns near 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
Final Thoughts: Trend Trading Strategies
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, they form patterns. Reversal patterns like tweezer tops or morning star patterns are important 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. Being able to draw trend lines is a good skill to have. They provide angular support and resistance.
A breakout 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.
