If you’re looking to trade the financial market, but are stumped by the numerous trading strategies out there, then using the trend following strategy might be the answer to your prayers. It is still one of the most popular trading strategies and has consistently shown its profitability when the market conditions are suitable, it is easy to understand and implement, and investors from the past and present have utilized this method into their investing strategies to achieve success in their trading careers.
This strategy is can be used with either technical or fundamental analysis, but it should be noted that it tends to lean more towards the technical approach. With the help of indicators and the proper risk management, using it is quite simple.
How it works
In every market, there are trends that form, whether it’s in the short term or long term. Either way, there are plenty of opportunities that are there for the taking. These trends are created by underlying factors in the economy i.e. news events, adverse situations in companies and some that may not be clear for traders that aren’t used to fundamental analysis. But the simple patterns that are created in the markets form trends that can provide traders with ample amounts of chances to earn a profit from them. The only trick is to have the right tools and strategy that can trade the trends efficiently.
The trend following strategy can be used to identify these trends early enough to enter the market and “ride” the trend to earn your profits. As long as there’s a good risk management system in place, trend trading is a great way to minimize the risk exposure that you’ll face as you’ll be trading along the market instead of against it. Surfers don’t surf through the waves, but instead ride them in the direction that they go with. Similar to trading, it is a whole lot easier to trade with the trend than against it.
Each trader has their own method of trading, whether it employs fundamental analysis, technical analysis or both. While technical analysis shows the visual aspect of the trends, fundamental can also show the trends, as long as the trader understands the information being presented. There are different indicators that are useful in assessing the trend in a market. The easiest way to determine where the market is trending is to utilize moving averages in the charting software. For example, if the market price is above the 200 exponential moving average, then the market is bullish; if it is below, then it is bearish. By using different time frames, you can also gain the big picture and use that as a reference to trade the smaller time frame trends.
The common phrase is that ‘the trend is your friend, until it ends’. You can follow the trend following strategy for as long as the trend is evident. By using the fundamental and technical analysis, you can gauge where the trend may end and take your profits prior to its end.