What is Trend Trading?
Trend trading is a trading technique that involves following the trend.
It is the direction of the market which informs the direction of trades in this technique.
If you have been trading for some time now, you must have heard the saying ‘the trend is your friend.’
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Well, its applicability is well evident in the trend trading technique.
Traders determine the direction and strength of a trend and place deals in that direction with respect to the trend strength.
If you just began trading on Olymp Trade and are wondering how to trade the trends, then here is the number one go-to guide for you.
This is a beginner’s guide to trend trading on Olymp Trade.
Trend Trading on Olymp Trade.
Trend trading on Olymp Trade is no rocket science. You should discover how simple it is by the end of this guide.
Onto business now.
Trend trading in Olymp Trade involves the following stages:
- Understanding Trends.
- Understanding Trend Types.
- Trading Trends.
- Adjusting Stop Loss and Take Profit.
A trend is a sustained price movement in a particular direction.
If the price has been rising for long enough, then such is a sustained upward price movement, hence an uptrend.
On the contrary, if the price has been falling for long enough, then that will be a sustained downward price movement, hence a downtrend.
What happens behind the scenes to cause trends?
Trends form due to the emotions of traders, particularly greed and fear.
When most of the traders are overcome by greed, they buy an asset causing an increased buying pressure which results in a price rise (uptrend).
On the flip side, when most traders succumb to fear, they sell an asset causing an increased selling pressure which results in a price fall (downtrend).
Trends can occur in any market and are the best to trade.
They are the best because the probability of winning is higher, and you can apply better reward to risk ratios to win big.
Everyone tells you that a market which forms higher highs and lows is an uptrend.
They also say that a market which forms lower lows and highs is a downtrend.
But is that enough information as regards the identification of trends?
Truth is, at times, you will find markets that will confuse you. Which you cannot tell whether they are uptrends or downtrends by using highs and lows.
But hey, I have a solution.
You can use moving averages to identify trends. The 20 period, 50 period and 200 period moving averages are perfect criteria for defining trends.
Any market trading above MA 200 is a long-term uptrend while any that trades below MA 200 is a long-term downtrend.
MA 20 and 50 are discussed in the next section.
Understanding Trend Types.
Trends are not equal in strength.
While some will be stronger, others will show weakness in strength.
You can use trend strength to determine the best manner to trade a trend.
In matters strength, trends are divided into three types:
A. Weak Trends.
They show an unclear tussle between buyers and sellers.
It is difficult to tell which side is taking control of the market.
However, at close scrutiny of moving averages, you will find out who is in control.
If buyers have an advantage, the price will often trade above MA 50 (weak uptrend).
If sellers have an upper hand, however, the price will often trade below MA 50 (weak downtrend).
A weak uptrend will have steep pullbacks and tend to retrace below MA 50.
Similarly, a weak downtrend will have steep pullbacks and tend to retrace above MA 50.
B. Healthy Trends
They are definite and they show either buyers or sellers in control.
There is occasional selling pressure on a healthy uptrend and occasional buying pressure on a healthy downtrend though.
The selling pressure occurring on the uptrend may be due to the action of bulls taking profits at certain levels or sellers trying to counter the trend.
On the flip side, the buying pressure on the downtrend may be due to sellers taking profits or buyers attempting to counter the trend.
All that notwithstanding, it is clear which direction the trend is headed.
A healthy downtrend retraces towards and never above MA 50.
Similarly, a healthy uptrend retraces towards but never below MA 50.
C. Strong Trends.
Here, either buyers are in control with little or no selling pressure or sellers are in control with little or no buying pressure.
It is a better version of a healthy trend because a trend in one direction is more pronounced and more definite.
A strong uptrend retraces towards and rarely below MA 20.
On the other hand, a strong downtrend retraces towards and barely above MA 20.
How are the different trend types traded in Olymp Trade?
You are just about to find out. It’s not difficult at all.
Here is how to trade trends in Olymp Trade:
A. Weak Trends.
In weak trends, the market is characterized by steep retracements, usually beyond MA 50.
The market actually appears to range and the best way to trade it is buying at the lower limit and selling at the upper limit of the range.
Just identify support and resistance levels within which the price tends to trade.
That way, you can sell at resistance and buy at support.
B. Healthy Trends.
Healthy trends are characterized by retracements that never go beyond MA 50.
The best trading technique here is pullback trading.
You can anticipate buying when a healthy uptrend retraces downwards to MA 50 and forms a bullish candlestick.
On the other hand, you can sell when a healthy downtrend retraces upwards to MA 50 and forms a bearish candlestick.
C. Strong Trends.
Strong trends are characterized by occasional retracements that rarely go beyond MA 20.
Most times, it’s difficult to catch the pullbacks because the market rarely actually retraces.
The best manner to trade this market is breakout trading.
You can wait to buy when a strong uptrend price breaks above a previous swing high.
On the other hand, you can sell when the price of a strong downtrend breaks below a previous swing low.
Adjusting Stop Loss and Take Profit.
The best thing to do while trading trends is to trail your Stop Loss.
That will serve as both a Stop Loss initially and a Take Profit later.
The reason you should trail your Stop Loss is that some trends will tend to reverse soon as others continue for so long.
So initially, your Stop Loss for buy trade should be below the Moving Average which the price seems to respect or below a previous swing low.
Your Stop Loss for sell trade should be above the moving average mostly respected by the price or above a previous swing high.
After the price has moved in your favor, you can trail your Stop Loss, using it to lock in profits.
In a buy trade, take profits if the price breaks below a respected moving average or below a previous swing high.
Similarly, in a sell trade, take profits if the price breaks above a respected moving average or above a previous swing low.
You have everything you need to identify and trade trends on Olymp Trade. Identify the various trend types and trade them like a pro on Olymp Trade.