What is trend trading?

Trend trading strategy suggests that by looking at historical price movements in markets, traders might have an improved probability in forecasting future price movements. Trend trading is generally considered a mid- to long-term trading strategy and is often used in shares, bonds, currencies, metals, and commodities.

Trend trading: One of the most popular strategies among traders

When the price of an asset is moving in one overall direction in a financial market, whether up or down (or even sideways), it’s known as a trend.

Trend trading is a trading strategy that involves identifying these trends and ‘riding’ them with the goal of following the trend to the end. It’s based on the idea that markets have an element of predictability. By analysing historical trends and price movements, you’ll be able to forecast what could happen in the future. Trend trading strategies aim to help you identify trends as early as possible and exit the market before they reverse.

Uptrends are seen when there are higher highs and higher lows, while downtrends will have lower highs and lower lows.

For example, if ACME Company’s share price increases by 100c, then declines by 50c, then rises by 110c and falls by 40c, it would be said to be in an uptrend as it is making higher highs and higher lows. If, however, the company’s share price decreases in price by 200c, then increases by 100c, falls again by 300c and rises by 50c, it would be in a downtrend because it is falling to lower lows and lower highs.

When developing a trend trading strategy, traders will use various technical indicators to identify the direction of market momentum. These include moving averages, the relative strength index (RSI) and the average directional index (ADX).

Generally, trend trading entails buying (going long) when the market is in an upwards trend, and selling (going short) when the market is in a downwards trend. When a market price is neither reaching higher price points or lower ones, it is said to be in a sideways trend. This is known as a bounded movement and is not generally considered an attractive trading environment for trend traders.

Trend trading works best in markets that are not prone to frequent reversals or erratic price movements. It’s usually considered a mid- to long-term trading strategy, but it can cover any timeframe, depending on how long the trend lasts.

Importantly, trend trading (like any form of trading) carries risk and is more likely to be a successful strategy for you if you have done proper research and fundamental analysis, and put good risk management controls in place.

One other key point to consider is that good trends don’t come along very often. However, when strong trends do appear, they are known for lasting much longer than most people estimate. A common trading mistake is not having a good strategy to identify a trend reversal, which means traders may exit a trade too soon.

How can I get started with trend trading?

It can be daunting to try to identify trends on your own, but there’s no reason to do all the legwork yourself. This is what market analysts do, day in and day out – they work to spot trends through analysing what’s happening in any given market.

Try this: Navigate to the IG news and trading ideas page. Click through a few of the recent story headlines and see if you can spot some of the market trends that the IG market analysts are commenting on. Some articles give broad trend or news overviews; others will suggest ways you can trade a trend, even including information on upside targets and where to set your stop-loss orders.

The best way to learn about trend trading, and trend indicators, is to try them out for yourself and see which strategy works best for you. You can practise trading with virtual funds in an IG demo account. Try trading along with one of the trends outlined by a market analyst to get a feel for how trend trading works without putting any real capital at risk.