Trading with a trend is the core of many investors trading strategy, which can also be referenced as ‘trend-following’. Trends can develop over minutes, hours, days and even weeks.
The basis of trend following is to recognise the opportunity of a slight trend in the general trend and hop on board. An example of this is when the market is in an up-trend then you should be looking to buy in and when the trend is going down the trader can look at making a profit by selling short.
Trend line analysis
Trend lines are an effective way of identifying where the trends are in order to build a trading strategy. They usually sit below the lows in an upward trend and slightly above the highs in a downward trend.
Success of trading is playing within the probabilities so trading with a trend as part of your trading plan and strategy would put you on the right side of the market sentiment so that momentum would be in your favor. You must also take into account that trends do not last forever and you should be prepared to make quick decisions keeping an eye on the market and making changes when the trend equally changes.
Support and resistance
Trend lines can act almost like a barrier to the price so a market which is trading upwards should have the occasional sell-off as markets do not move in straight lines. A wise investor should see weakness in an uptrend and take that as an opportunity to buy in utilising that trend line as a reference point. When the market is above the trend line as in an uptrend, is thought to still be intact and this can be a core component of an effective but simple trading strategy.
On the flip side is a downward trend, the market does have the occasional strong rally but it resists to break through the falling trend line. Trend following traders will use these short bursts of strength to short sell and make a profit accordingly. You can only really asses if the trend line you are following is broken by the price, then you know that it could be running out of steam.
Trading market rises and falls
Unfortunately no one has successfully built a time machine as of yet, so spotting trends aren’t so easy, so everyone has to trade on the present value of the asset. Although after some timely experience and expertise advice upward trends can be spotted in early stages.
A classic understanding of an uptrend is very spikes and equally higher lows. These should be quite easy to spot within the time frame of your trade. Applying a trend line is a great way to give you a reference point on where exactly you should enter the trade and equally where to come out if in fact the trend ends.