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June 5, 2020

The Trend Is Your Friend

Frank Cabibi

Featured Photo From: https://tradingpsychologyedge.com/trend-trading/

What is trend trading?

One of the most popular strategies that traders use from beginners to experts alike, is trend trading. Trend trading is simply generating position(s) on a currency pair, stock or index based on the overall momentum of the market. If prices consistently move in a single direction over time, then you are looking at a trend.

How to spot a trend

When looking at any trading chart, you'll notice that prices are always moving up and down. But to spot a trend, you will see either higher highs and higher lows or lower highs and lower lows.

Chart showing a moving average acting as support
https://www.investopedia.com/articles/active-trading/041814/four-most-commonlyused-indicators-trend-trading.asp

On the chart above, notice how each consecutive low is higher than the one before, and it's the same for each high too. In this case, higher lows and higher highs on the SPY indicate that a long term bullish trend is in play.

Popular Trend Trading Methods

The cool thing about this strategy is that it is used by both beginners and veterans in the playing field. That's because it's an easy technique to spot and billionaire investors like CEO of Berkshire Hathaway, Warren Buffett, use to generate billions of dollars. Of course, he has many different methods of trading, but his overall sentiment for stocks is to buy and hold.

Here are some popular methods of trading the trend:

A trader might see the start or continuation of a trend and make a one-time buy at the perceived beginning of a trend. It's difficult to spot the very start of a trend, but if you catch it, you can be holding on to long term profits. Some traders may get anxious after making any sort of profit on the first upswing and want to close early. But as you can see, that would have been a mistake on this CAD/JPY pair.

Here is a similar method, but instead of buying once, the investor puts in several entries on the way up. Accumulating your position size can be way more profitable than buying only once. If this trader bought at all these points and sold reasonably close to the high, all those positions add up over time and can be extremely profitable.

Another technique to trading the trend is by taking trades within the trend. After noticing that trend is in place, a trader might enter a buy on a dip and sell after an upswing. This is where the phrase "The Trend is Your Friend" comes from. Using the momentum of the overall momentum, a trader can enter on a dip and wait for the trend to take over. This way, entries do not have to be exact. Even in drawdown, if your position is pro-trend, traders usually wait in their drawdown anticipating the trend's momentum.

You can think of trends as the tide: Waves wash back and forth on the beach, but at the same time, the tide moves further and further on to land. And then, the tide contracts and moves farther out to sea, all the while the waves are in a constant back-and-forth motion. The waves represent short term swings and the tide is the longer term trend.

Conclusion

Trend trading is one of the most popular strategies out there as it’s one of the easiest techniques that traders can do. If done right, you could be looking at some big winners in the future. The main thing to focus on when trend trading is controlling your patience, letting the trend work itself out. Let your winners run and be patient. After all, the trend is your friend!

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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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