When it comes to the share trading market, there is a lot more than meets the eye. Amateur traders think that trading works on pure luck, but the fact is that traders who succeed learn to enhance and cultivate their skills. They base their trades after detailed research and analysis, reading charts, patterns, trading indicators and trends. Based on these readings, these derive and follow strategies until their investment reaches its fruition. One of the most common strategies that most traders rely on is the trend-following strategy. Here’s a detailed guide to help you understand it.
So what is trend-following?
Trend following is defined as a trading methodology or practice that attempts to capture the different trends occurring across the various markets. It is a strategy based on the idea that if traders ride the trend, then they can avoid losses. As such, they buy securities before the price goes up and sell them before the price goes down. Trend followers typically implement proper risk management strategies before investing. Such traders do not aim to predict or forecast a trend; they believe in following the existing trends and keeping an eye for any emerging trends in the market.
Implementing strategies for trend following – How it works
The aim of devising a good strategy for trend-following trading is to leverage the various market scenarios profitably. As we all know, the trading market is characterised as a high-risk high-reward market. Based on the opinions of market leaders and influencers, a general perception is created, and soon enough, the buzz is generated, which gets investors interested. The buzz is typically generated based on technical analysis of market data, while intangible aspects related to trading are also measured. As such, traders attempt to identify the various parameters, governing a trade, after which a strategy for trend following falls into place. That said, you cannot rely on any single indicator to predict how to buy and sell stocks securely.
You would typically need to combine varying strategies to create a trend-following trading system. Here are the best ones.
3 trend following trading strategies or indicators you should know about
1. Bollinger Bands
A Bollinger band is a rather useful trend following indicator, which assumes that prices of securities will bounce back. The bands measure volatility and show the highest and lowest points of a security and can be used in uptrends, downtrends and ranging markets.
2. Moving Averages
Moving averages help you see an underlying trend behind a security. While there are various types of moving averages, trend followers prefer to use the slow-moving average, which helps them concentrate on the trends’ original price and direction. It also prevents you from mistaking temporary changes in the prices of trends.
3. Head and Shoulders
Another popular strategy or indicator for trend-following preferred by traders is the head and shoulders strategy. The head and shoulders pattern signifies that a trend has reached its end and that a new trend is emerging. This pattern also works upside down. In it, the head represents the highest or the lowest price reached by a security, whereas the shoulder signifies two high or two low points.
5 trend-following principles to consider
- Buy securities at a high price and sell them at an even higher price
- Avoid making market predictions since it can cloud your judgement. Instead of losing objectivity and making fatal trading mistakes try to follow the price.
- Implement a proper risk management strategy by not risking more than a fraction of your trading capital.
- As a trend follower, you may not have a specific profit target. However, not having a specific target doesn’t mean you do not set a stop/loss target.
- Instead of sticking to one market place, you should enter into trades in various markets. Doing this can increase your odds or chances of capturing and following various trends.
Trading strategies for trend-following are ideal for investors who wish to enter into regular trades but have a conservative risk appetite. Following trends can prove lucrative as the risks are reduced significantly. To know more about trend following contact an Angel One expert.