Trend Following or Trend Trading Strategy: Meaning, How to use, Examples

Trend trading or trend following is a trading strategy with which traders can identify the direction of a prevalent trend and then buy or sell assets based on that trend. Trend traders use technical analysis tools such as moving averages (MA), trend lines, and momentum indicators to explore and identify market trends. Traders using technical analysis will look for patterns in price movements and analyse charts to determine areas of support and resistance.

Riding the trend

When a trend trader has identified a trend, they will enter a trade in the direction of that trend, whether it is going up or down, to ride the trend for as long as possible. A trend trader may enter into a long position (buy) if the price is trending upward or a short (sell) position if the price is trending downward.

Trend following strategies

Since trend traders want to catch prevailing trends and ride them as long as they can to make money, then they develop strategies based on an asset’s trends. A trend-following strategy would be developed on the assumption that the price of an instrument will continue to increase or decrease, and this trend will not reverse. So, if you are trading an uptrend then you will hold a long position, but you would sell your asset if the trend is going downward.

Trend following examples

In the case where the price increases, trend following traders will try to gain from the price change by entering a long position. An uptrend is recognised as such when the trend is making higher highs and higher lows. On the other hand, when the price is decreasing, a trader will go short and sell as the trend is making lower lows and lower highs.

Another example is a sideways trend when the price is not going lower or higher, but is moving within a range. In such a scenario, traders won’t attempt to make any gains unless they are going after very short-term price movements, such as in a scalping strategy.

Using IronFX’s MT4 trading platform or any other advanced platform, traders can implement trend following strategies when trading CFDs. In this case, they will buy or sell a number of units for an instrument, depending on the direction of the price. It is important to know the risks involved in trading such derivatives as CFDs.

Short-term and long-term trends

Trend traders may use strategies that focus on short-term or long-term trends. For example, short-term traders such as day traders​​ will concentrate on short periods and trends that can be identified throughout the day in order to make profits from short-term price fluctuations. For short term trends, traders may use such strategies as scalping or intraday trend following strategies.

Intraday trend trading

For those traders who are after short-term trends, intraday trend trading is ideal as they can hold positions until the end of each day. They can analyse trends that are active within the day, for a few minutes or hours. For example, if there is an uptrend, a trader would place a trailing stop before the low and at the next higher low, in case there is a reversal. If they are following a downtrend, the trader may utilise a short selling strategy.

Long-term trend trading

Long-term trend traders tend to hold a position for longer periods of time, such as a few weeks, months, or even years. Long-term traders usefundamental analysis and focus on the longer-term trend and those factors that may have an impact.

Position trading

Long-term traders tend to use position trading which involves buying and holding a position for extended periods of time. Without concerning themselves with shorter-term trend movements, the focus is on the long-term objective. However, if short-term fluctuations potentially influence the long-term outlook of their position, then trend following is important and plays a significant role in attempting to attain long-term gains. In order to evaluate potential price trends on the market, it is common for position traders to focus more on fundamental analysis​​.

Popular trend trading indicators

When creating a trend trading strategy, traders can apply technical indicators to trading charts to help them identify trends.

• Moving Average Convergence Divergence​ (MACD): MACD is an oscillating indicator that can help traders identify new trends and determine whether they are bullish or bearish.
• Relative Strength Index​​ (RSI): this indicator helps to determinethe future direction of a market and to confirm whether momentum is accelerating or decelerating. They can also establish whether an asset is overbought or oversold.
• Parabolic SAR​​: this “stop and reversal system” indicator helps traders to determine the current trend direction and identify potential reversals.

Trading trend reversals

If a price trend changes and instead of going up, it begins to go down, or vice-versa, then we say there is a trend reversal. Traders can use these reversals and capitalise on them by getting out of a position before it changes. This is called trading trend reversals, or “counter-trend trading.”

Counter-trend trading strategy

This technique is used to speculate on a trend reversal and then trade against the current trend. It is considered a method of swing trading​​ as trades predict a potential reversal, or a “swing” in the trend. Traders will analyse trend patterns, and proceed to buy or sell an instrument that is changing direction. The trader will then buy or sell it back at a better price. Traders using a counter-trend strategy will go after smaller gains and are always aware of potential losses in case their predictions fail.

Why start trend trading with IronFX?

Trade with a leading company and explore trend trading strategies with the greatest resources and most sophisticated trading platforms. IronFX is an excellent choice for beginners and more advanced traders as it allows them to explore the markets using the right tools and services tailored to a wide range of levels. It is also a trustworthy broker catering to the needs of traders from all parts of the world in a fair and clear manner.

Recognised globally for its commitment to excellence, IronFX offers more than 500 instruments across forex, commodities, indices, métaux, contrats à terme, et actions. The forex broker’s focus on the latest software means that traders have access to advanced platforms, including access to the MetaTrader 4 platform, mobile and web trading apps and many more, ensuring a seamless trading experience.

IronFX also places weight on security, so that traders’ data is secure at all times. When it comes to costs, the broker offers some of the tightest spreads in the industry, allowing traders to reduce costs and trade more efficiently. The broker stands out for its variable leverage and lightning-fast execution, so all trades are executed with very competitive trading conditions.

IronFX’s customer support is also available 24/5, providing expert assistance to clients worldwide. Additionally, the broker’s educational resources and market analysis tools are some of the best in the industry, keeping traders informed and ahead of market trends.

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