Strategy › Trend Trading Strategy: Catch the Trend - How it Works

Trend Trading Strategy: Catch the Trend - How it Works

If you want to learn more about trend trading and how to catch a trend than this article is for you. What does it mean for a market to trend? This is a key part of technical analysis because trading is all about identifying a well-established trend or a trend that is about to begin, then you can take advantage of that by getting on board with that trend and then getting off before it’s over or slightly after it peaks or bottoms.

The market can be in one of the following three stages:

  1. Uptrend
  2. Downtrend
  3. Sideways or ranging.

Trend Trading Strategy: Catch the Trend - How it Works

The best way to catch a trend is through using a moving averages and one of the most common moving averages used by technical analysts and professional traders is the 20-day moving average and the 50-day moving average. This can help smooth out the day-to-day fluctuations in price action to make it easier to identify the predominant trend at any given time.

Trend Trading Strategy: Catch the Trend - How it Works

When both the 20-day MA and the 50-day MA are pointing out and the 20-day MA is trading above the 50-day MA this indicates a very strong upward trend. Conversely, if the 20-day MA is trading below the 50-day MA this indicates a very strong downward trend. Normally, the bigger the distance between the 20-day MA and the 50-day MA the stronger the trend is.

What is the Benefit of Trend Trading Strategies?


If you want to catch big strong bearish trends wait for the 20-day MA to cross below 50-day MA. This is the simplest method every trade can use in his arsenal if it wants to catch trends. Obviously, the preferred time frame to catch these big trends is the daily time frame.

Trend Trading Strategy: Catch the Trend - How it Works

If you want to catch big strong bullish trends wait for the 20-day moving average to cross above 50-day moving average. In figure below you can observe a case study of a bullish trend and how one would have been able to enter right from the beginning of the new trend.

Trend Trading Strategy: Catch the Trend - How it Works

One of the basic trend trading strategies is to trade based on trendline breakouts. Usually, when you’re in a downtrend you can draw a trendline connecting all the highs. Once a breakout of that trendline occurs, that can be an early indication that the old trend is about to end and a new bullish trend is about to start. Before buying the trendline breakout, it’s best to wait and have at least 3 consecutive daily closes above the trendline in order to make sure you’re not dealing with a false breakout and you have indeed a genuine breakout.

Trend Trading Strategy: Catch the Trend - How it Works

Usually, when you’re in an uptrend you can draw a trendline connecting all the lows. Once a breakout of that trendline occurs, that can be an early indication that the old trend is about to end and a new bearish trend is about to start. You use the same trading techniques to enter as in the above example.

Conclusion


No matter what type of trader you’re, it’s very helpful to be able to identify the beginning of a trend as opposed to recognizing the trend well after it has been in progress. As the old maxim says “ the trend is your friend” means that as long as you’re aligned with the trend and have a way to consistently determine what the trend is you have higher chances to succeed in this business.


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