Typically, markets resemble waves rising and falling over a period of time. Trend trading (or trend following, as it is also known) is a form of trading that endeavors to identify and capitalize on the price direction of a security. Through technical analysis, trend traders identify an uptrend (increasing price) of an asset, or a downtrend (decreasing price) of an asset, and enter either long or short positions based on the price movement. Ultimately, the goal of this type of trading is to identify an established trend or one that is about to commence, enter a trade, and exit before the trend ceases.
In particular, trend following is a common strategy used in commodity trading. Commodities are physical assets such as agricultural, mining, or energy products that can be bought and sold. These interchangeable goods are traded daily in the commodities market. In the US, there are commodities exchanges located in New York (New York Mercantile Exchange), Chicago (Chicago Mercantile Exchange), and Atlanta, Georgia (the Intercontinental Exchange).
There is no guaranteed fail-safe strategy when it comes to trend trading. Ultimately, any trend trading strategy must recognize the optimum trade entry point and exit level, in addition to implementing a stop-loss close to control risk.
Here are some tools that are used in trend following to recognize trading opportunities.
This indicator plots an asset’s price movement over a set period of time, such as 20, 50, or 200 day periods. Simple Moving Averages (SMAs) are indicators utilized in technical analysis. SMAs enable a trader to easily analyze the price trend of a security. This indicator supplies both support and resistance levels which could be signals denoting optimum trade entry and exit points.
MACD is an acronym for “Moving Average Convergence Divergence”. This is a technical indicator that is a popular trend trading strategy. It is comprised of two moving averages: the MACD line and the signal line. If an asset’s MACD line crosses above its signal line, this denotes that the price may increase, thus an optimum entry signal for a buy trade. Conversely, should the asset’s MACD line cross below its signal line, this could denote an optimum sell trade.
This is a momentum oscillator that gauges fluctuations in the price of a security, and the speed with which that change occurs. The RSI usually tracks an asset’s price movement over a two-week period, from 0 to 100 – 70 or higher often denotes an uptrend, while 30 or lower denotes a downtrend.
It is crucial to understand that because there is the potential for volatility in the stock market and the commodities market, trend trading (and trading in general) is considered speculative and riskier than some other investment vehicles. Trend trading has the potential for significant financial loss and is NOT appropriate for all investors.
The simplest way for an investor to trend trade is via a broker. Because there are numerous brokerages, the choices can be a bit overwhelming, especially for beginners. Here are some of the most popular and respected online brokers for trend trading.
Fidelity is a popular choice for investors who want access to equity trading, international trading, and IPOs. In addition, Fidelity offers comprehensive research tools and no commission for online US stock trades.
Charles Schwab is another popular choice for investors. The company has no minimum account requirements, $0 commission for online stock trades, and provides access to comprehensive research and trading tools.
E*Trade is a good choice for investors who want professional guidance, in addition to access to comprehensive research tools and market data that is intuitive and user-friendly.
If investing in stocks is something that you are interested in, give this free stock trading simulator a try before leaping into the real-world stock market. It’s fun and informative and will help you hone valuable skills and techniques to become an effective trader.
Here is a comparison table examining the different types of trading.
Type of Trading Best Suitable For Risk vs. Potential Return Control Over Investments Research and Legwork Needed
Options Active Traders Lower-level Risk
(When Done Correctly)The investor has complete control over which companies are selected, and what options contracts are chosen. All research and trading is done by the investor.
Stocks Beginners and Long-term Investors High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
ETFs Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Bonds Beginners and Long-term Investors Lower-level Risk If investing in individual bonds (rather than bond ETFs) the investor has direct control over all invest decisions. All research and trading is done by the investor, if investing in individual bonds.
Mutual Funds Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Futures Active Traders Medium-level risk (when done correctly) The investor has complete control over which futures contracts are chosen. All research and trading is done by the investor.
Swing Trading Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Day Trading Active Traders High risk, yet has the potential for larger gains if done correctly. The investor has direct control over all invest decisions. All research and trading is done by the investor.
Commodity Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Trend Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Trend trading (or trend following, as it is also known) is a form of trading that attempts to identify and capitalize on the price direction of a security. Through technical analysis, trend traders identify an uptrend (increasing price) of an asset, or a downtrend (decreasing price) of an asset, and enter either long or short positions based on the price movement. Ultimately, the goal of this type of trading is to identify an established trend or one that is about to commence, enter a trade, and exit before the trend ceases.
Swing trading is a form of trading that holds a financial instrument (such as stocks) for several days or even months in an attempt to profit from price fluctuations, or “market swings”. Swing traders utilize technical analysis to determine market swings. The essence of swing trading is buying or short selling stocks to capitalize on these small market swings.
Trend following is simply another term for trend trading. In particular, trend following is a common strategy used in commodity trading. Commodities are physical assets such as agricultural, mining, or energy products that can be bought and sold. These interchangeable goods are traded daily in the commodities market. In the US, there are commodities exchanges located in New York (New York Mercantile Exchange), Chicago (Chicago Mercantile Exchange), and Atlanta, Georgia (the Intercontinental Exchange).
The MACD is an acronym for “Moving Average Convergence Divergence”. This is a technical indicator that is a popular trend trading strategy, which assists traders in recognizing trading opportunities.
It is comprised of two moving averages: the MACD line and the signal line. If an asset’s MACD line crosses above its signal line, this denotes that the price may increase, thus an optimum entry signal for a buy trade. Conversely, should the asset’s MACD line cross below its signal line, this could denote an optimum sell trade.
The Relative Strength Index (RSI) is a momentum oscillator that gauges fluctuations in the price of a security, and the speed with which that change occurs. The RSI usually tracks an asset’s price movement over a two-week period, from 0 to 100 - 70 or higher often denotes an uptrend, while 30 or lower denotes a downtrend.
Stocks are either traded on stock exchanges or privately. Suppose, for instance, Company X makes very good chocolate. Company X’s products are so popular, that it wants to expand so it can sell its chocolate globally. Therefore, it must raise capital for the endeavor. Typically, to raise capital a company either takes out a loan, or issues shares of stock (deemed “going public”). Thus, by selling shares of stock to investors, Company X can raise capital without going into debt.
Say Company X wants to raise $1,000,000 to expand globally, and decides to issue 1,000 shares of its stock - thus, each share will represent 1/1000th of the company. When Company X goes public at the IPO (initial public offering), each share will therefore be worth $1,000. Presuming that Company X’s profits begin to increase, then its stock price typically will also rise. Conversely, should Company X’s global expansion not prove successful, then its value could decline, as could the market value of the shares.
There are three key factors to take into account when reading stocks.
1) When looking at a stock chart, gauge what the trend of the stock is. Whether the share price is increasing (uptrend), decreasing (downtrend), or essentially a sideways drift where there is little fluctuation in price.
2) Pay particular attention to the price and volume of the stock. Ultimately, it is large institutional investors that influence whether a stock price will rise or fall, by either buying or selling large quantities of specific stocks.
3) Determine whether a specific stock is being supported by large institutional investors such as fund managers, for example, or whether it is meeting resistance on an uptrend.
Ultimately, there is no guaranteed fail-safe strategy when it comes to trend trading. Yet, any trend trading strategy must recognize the optimum trade entry point and exit level, in addition to implementing a stop-loss close to control risk. Some of the best and most popular indicators for trend trading include the MACD, Moving Averages, and the RSI.
The MACD (Moving Average Convergence Divergence) indicator tracks the trend of a specific security’s price. This technical indicator is used as a trading strategy that assists traders in recognizing trend trading opportunities.
A Moving Average is an indicator that plots an asset’s price movement over a set period of time, such as 20, 50, or 200 day periods. Simple Moving Averages (SMAs) are indicators utilized in technical analysis. SMAs enable a trader to easily analyze the price trend of a security. This indicator supplies both support and resistance levels which could be signals denoting optimum trade entry and exit points.
The Relative Strength Index (RSI) is a momentum oscillator that gauges fluctuations in the price of a security, and the speed with which that change occurs. The RSI usually tracks an asset’s price movement over a two-week period, from 0 to 100 - 70 or higher often denotes an uptrend, while 30 or lower denotes a downtrend.
Trend trading utilizes technical analysis to identify an uptrend (increasing price) of an asset, or a downtrend (decreasing price) of an asset, and enter either long or short positions based on the price movement.
Day trading is a form of trading that holds an asset for a single trading day, in an attempt to profit from price fluctuations in the markets. In theory, by closing all positions (or “position squaring” as it’s also known) on the same day, day traders avoid the risks involved with holding a security for the long-term.
Stocks are the most common securities involved in day trading. However, other day-traded securities include currency, futures, options, and commodities.