This strategy describes when a trader uses technical analysis to define a trend, and only enters trades in the direction of the pre-determined trend.
‘The trend is your friend’
The above is a famous trading motto and one of the most accurate in the markets. Following the trend is different from being ‘bullish or bearish’. Trend traders do not have a fixed view of where the market should go or in which direction. Success in trend trading can be defined by having an accurate system to firstly determine and then follow trends. However, it’s crucial to stay alert and adaptable as the trend can quickly change. Trend traders need to be aware of the risks of market reversals, those which can be mitigated with a trailing stop-loss order.
Several trend-following tools can be used for analysing specific markets including equities, treasuries, currencies and commodities. Trend traders will need to exercise their patience as ‘riding the trend’ can be difficult. However, with enough confidence in their trading system, the trend trader should be able to stay disciplined and follow their rules. However, it’s equally important to know when your system has stopped working. This usually occurs due to a fundamental market change, therefore it’s important to cut your losses short and let your profits run when trend trading.