Trend following trading strategies involve buying an asset or financial instrument when its price is going up with momentum and selling when the price is going down with the expectation that the price will continue to move in the selected direction for an extended period of time.
The term trend is derived from the fact that the market is moving in one overall direction which is either up or down.
Trend trading can be done in the short, intermediate or long term so you can select a timeframe from which to do your analysis and make trading decisions from. Timeframes frames range from one minute charts all the way up to daily, weekly and monthly charts.
The monthly chart above of Wall Street (Dow Jones Index) is a market that has beed trend up for an extended period of time and can be described as having been on an uptrend on this
During this period a trend trader takes Long positions (Buys) on Wall Street, possibly setting profit targets as the market moves and also setting Stop Loss levels to minimise losses if the market reverses and starts moving downwards.
Traders use price action and/or technical analysis tools such as moving averages and momentum indicators to determine the trend on any given market. If price of a given market is making higher highs and higher lows, some traders will describe that market as being on an uptrend, and if a market is making lower lows and lower highs then the market can be described as trending downwards.
It is important to note that trend is relative to the timeframe that you are looking at for your analysis. The monthly Wall Street chart can show the market as trending up whereas if you go to smaller timeframe such as a 30 minute chart of the same market, the price could be trending in a downward direction. So be diligent when analysing the trend on any given market.
Disclaimer – Futures, CFD, Margined Foreign Exchange trading, Warrants, Options and Spread Betting all carry a high level of risk to your capital. Only speculate with money you can afford to lose. Futures, CFD, Margined Foreign Exchange trading and Spread Betting may not be suitable for all customers, therefore ensure you fully understand the risks involved and seek independent financial advice if necessary.
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