Popular trend trading strategies

If you’re looking to enter a trend, there are several ways to do so, but two of the most popular are pullbacks and continuation patterns.

Pullback trading

Pullback trading is a strategy where you try to take advantage of temporary price reversals within an existing trend. In other words, when an asset is in an uptrend or downtrend, pullback traders look for moments when the price temporarily retraces or ‘pulls back’ from its recent movement in the opposite direction of the trend. The goal is to enter the market at a favourable price level and to follow the trend to its end.

Traders will often look for key support levels or resistance levels to determine when a pullback has run its course and price is ready to resume in the direction of the prevailing trend.

• Support levels: A level in an uptrend at which an asset's price tends to stop falling and may even reverse direction, moving back upward. Support levels may form at the low points of previous price movements, where buyers have stepped in before. Traders may choose a support level as an entry point to buy into the market
• Resistance levels: A level in a downtrend at which an asset's price tends to stop rising and may reverse direction, moving back downward. Resistance levels may form at the highs of previous price movements, where selling pressure has emerged before. Traders may choose a resistance level as a selling opportunity as they look to exit a market

Support and resistance levels can be affected by market sentiment, news events, or other factors, so it’s important to use them in conjunction with other forms of analysis and risk management strategies when trading.

It's important to note that major support and resistance levels are rarely exact figures. It's unusual for a market to hit exactly the same price time after time before reversing, so it's probably more useful to think of them as support or resistance zones.

Continuation patterns

Continuation patterns are technical chart patterns that indicate a temporary pause or consolidation within an existing trend before the trend resumes. They tend to suggest that a prevailing trend is likely to continue once the consolidation is complete. Traders use continuation patterns to try to predict the next potential price movement in the ongoing trend. There are many patterns, but some of the most common are triangles/wedges and bear/bull-flags.

1. Triangles/wedges: As the name suggests, this pattern looks like a triangle or wedge on the chart. There are different types, including an ascending triangle (which signifies the continuation of an uptrend), a descending triangle (the opposite of an ascending triangle, signifying the continuation of a downtrend), and a symmetrical triangle (sometimes indicating indecision in the market). Usually, the market will continue in the same direction as the overall trend once the pattern has formed.

2. Flag patterns: A flag pattern forms when there's a sharp price move (called a ‘flagpole’) followed by a parallel consolidation (the ‘flag’) that slants against the prevailing trend. Flag patterns are also called ‘pennant patterns’. They can be either bullish or bearish. Bullish flags are spotted during an uptrend when there's a strong upward move followed by a short sideways or slightly downward movement. Traders may consider this a good time to buy as they expect the uptrend to continue. Bearish flag patterns are the opposite – when the flagpole goes downwards, with a short sideways or slightly upward movement. Traders may consider this a good time to sell, anticipating that the downtrend will continue.

Learn more about chart patterns and how to use them here.

Practise identifying patterns

In your demo trading account, choose a market that you’re interested in and start to look for common chart patterns by:

1. Studying historical charts: Identify instances where continuation patterns have formed in the past. Take note of how prices behaved before and after the pattern.
2. Drawing the patterns: Use the drawing tools to manually mark and draw continuation patterns as you think you spot them. This will help you visualise patterns more effectively.
3. Try different timeframes and assets: Try to spot patterns in different contexts.
4. Check and document your analysis: After a pattern completes, compare the actual price movement with your analysis to see whether your predictions were accurate or not. Make a note in your trading diary about the patterns you’ve spotted and analysed, and how the trend behaved once the pattern had completed. This will help you to improve your ability to identify trends and refine your trend trading strategy.

Technical analysis is based on the premise that what happens in the past can be used to predict what might happen in the future. But future performance can never be guaranteed.

As you’re learning to identify patterns (which takes time and practice) it’s safer to use a demo account and virtual money to simulate trades, so you don’t put real capital at risk. Apply risk management techniques, such as implementing stops and limits, to mimic real trading conditions.