Trend trading is when traders make purchasing decisions on stock price trends over a set timeframe. When done properly, trend trading can be a cost- and time-effective way to invest in the stock market. Some technical analysis and stock market knowledge are keys to becoming an effective trend trader.
Average directional index ADX Moving average trend indicator As the name suggests, a moving average MA indicator finds the average price of an asset over a given timeframe. By doing so, it creates a smoothing effect on the price data, producing a single line that can help traders identify trends.
Three top trend indicators
There are popular choices, such as the day and day moving averages, but ultimately the choice will depend on the individual. Moving averages are lagging indicators, which move slower than the market price. This means that MAs cannot be used to predict future trends, but rather, tell you what has happened previously. They are very useful for trend traders, as the direction of a MA can help confirm whether the market is moving up, down or sideways.
Example of a Trend and Trendline What is a Trend? A trend is the overall direction of a market or an asset's price. In technical analysis, trends are identified by trendlines or price action that highlight when the price is making higher swing highs and higher swing lows for an uptrend, or lower swing lows and lower swing highs for a downtrend. Many traders opt to trade in the same direction as a trend, while contrarians seek to identify reversals or trade against the trend. Uptrends and downtrends occur in all markets, such as stocks, bonds, and futures.
When looking at a single moving average, a trader would focus on whether the price is above or below the MA. If the price is above the moving average, it is indicative of an uptrend and if the price is below the moving average, it is an indication of a downtrend.
However, a common moving average strategy is to look for crossovers between two moving averages, as this can signal a change in the price direction.
Moving average trend indicator
In our below example, the fast EMA the blue line covers a nine-day period, while the slow EMA the red line is set to a day period. Relative strength index RSI trend indicator The relative strength index RSI is used to identify momentum in prices and overbought or oversold signals. It does so by looking at the average gains and losses over a certain number of periods — usually 14 periods — and ascertaining whether more price movements were positive or negative.
The RSI is presented as a percentage, which fluctuates trend what is trading a scale between zero and These levels are used by traders as signals that the trend might be reaching its maturity. It is worth noting that the market can remain overbought or oversold for extended periods of time.
- Exit rules Money management and position size rules The correct approach to each of these trading system components for a good trend trading system is described in our trading systems section.
- When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades?
The RSI is not necessarily a signal for an immediate change in trend because although the RSI only fluctuates between zero andthe market price can range over a much larger set of values. Usually though, a trend trader in a long position will use the overbought signal as a price point at which to lock in their profit and exit their trade.
While a trader looking to open a short position would use the overbought signal as an entry point. Trend traders utilising the oversold signal would do the reverse: using the oversold signal as the point at which to exit short trades and open long trades.
Average directional index ADX trend indicator The average directional index ADX is used by traders to determine the strength of a trend — whether this is up or down. Trend what is trading ADX line fluctuates on a scale from zero to Values from 25 to indicate a strong trend, with the strength increasing as the numbers get higher, while values below 25 indicate a weak trend. While the ADX line identifies the strength of the trend, the other two lines determine its direction.
Technical analysis is just one part of a successful trend trading strategy. How to start trend trading Open an account.
You can open an account with IG quickly and easily Practise trading on a demo account. Test your trend trading in a risk-free environment with an IG demo account Alternatively, you can join IG Academy to learn more about financial markets.
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While some trend traders might choose to focus on one specific market, others diversify their opportunities by spreading their positions over a range of markets — gaining exposure to more trends. These might include breaking news, central bank policy announcements and political events. Implement a risk management strategy Most trend traders will utilise both stops and limits to protect their trades.
Limit close orders exit a position at a more favourable market price, enabling traders to lock in a profit.
While stop-losses will close a position out the market moves against the position by a predetermined amount. As trend reversals can happen at any time, it is vital to have a risk management strategy in place.
1. Trading with the trend: The Line Graph
It is important to have a plan for which markets you will trade and how you will manage your risk The best way to learn about trend trading, and using trend indicators, is to try them out for yourself and see which strategy works best for you.
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What is Trend Trading? Trend trading the financial markets is no longer only for the Wall Street big shots or the highly educated bankers in Canary Wharf.
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