Trend trading is a trading style that attempts to capture gains through the analysis of an asset’s momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend.
Trend traders enter into a long position when a security is trending upward. An uptrend is characterized by higher swing lows and higher swing highs. Likewise, trend traders may opt to enter a short position when an asset is trending lower. A downtrend is characterized by lower swing lows and lower swing highs.
Trend following strategy
Trend traders create strategies that are developed based on analyzing the trends of an asset. A trend following strategy is based on the expectation that the direction of price will continue in its current form and the trend will not reverse. This means that if you are trading an uptrend, you could continue to hold your long position and watch the asset increase in value, while you could choose to sell your asset if the trend is going downward.
Trend following examples
Below is an example of an uptrend, which is when the price rises in value. Traders following the trend pattern would attempt to gain from the movement by entering a long position as the price level increases. When the trend is making higher highs and higher lows, then it is showing an uptrend.
The chart below shows a downtrend, which is when the price is decreasing in value. Traders could then go short and take a sell position as the trend is making lower lows and lower highs.
Generally, traders do not seek to make any gains with this type of trend, unless they are analyzing extremely short-term price movements, such as in a scalping strategy, for example.
Using our award winning platform*, traders can implement trend following strategies when spread betting, which is a tax-efficient** way of speculating on the price movement of the underlying assets. Users of our platform can also trade CFDs, which work in a similar manner and enable traders to buy or sell a number of units for an instrument, depending on the direction of the price. You can spread bet and trade CFDs by opening an account with us. It is important to understand the risks of trading with derivatives, such as recognising that a trade position can result in gaining profit as much as a loss occurring if a trade does not go the intended way. Read more about leveraged trading for further understanding.
A particularly useful technical analysis tool on our platform is the ability to create trendlines. Traders can take advantage of customisable charts and drawing tools to highlight the price action and overall direction of a trend, which can be applied to multiple chart time frames. These features enable traders to take the quality of their analysis to an even higher level.
Trend following techniques can be used for strategies that concentrate on either short-term or long-term trends.