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What is Trend Trading?

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  • Written By: Charity Delich
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 November 2016
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Trend trading involves buying and selling assets, such as securities, commodities and currencies, in line with current market movements. Trading in conjunction with existing market trends is an investment strategy commonly used by traders. Using this method, traders seek to capitalize on the ups and downs of financial markets. Trend trading is also referred to as trend following.

A trader who adopts a trading trends strategy tracks whether an asset is moving up or down in the present market. Typically, the trader assumes that the asset will continue to move in one direction – either up or down – until some point in the future. As long as the asset continues to move in one direction, the trader generally holds his or her position on the asset.

When market trend trading, traders usually hold either long positions or short positions. In general, a long position refers to the purchase of assets with the anticipation that those assets will increase in value. In the context of stock trend trading, a trader may enter into a long position if a stock is achieving successively greater highs. For instance, if there is a housing boom, a trend trader may obtain a long position on stock in building companies.

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A short position, on the other hand, typically refers to the sale of assets with the anticipation that those assets will decline in worth. If a stock consistently drops, a trader may seek a short position on the stock. If the price of gas steadily decreases, for example, a trend trader may desire to hold a short position on stock in an oil company.

Many trend traders use computerized trend trading systems to recognize price movements on various assets. These trend following systems seek to find established trends. Once a trend has been recognized, the system helps traders capitalize on its movement until the trend starts to reverse. Typically, these systems provide traders with tools, such as charts and pattern recognition scans, for viewing potential assets to buy and sell.

Counter trend trading is the opposite of trend trading, and it is usually used less frequently by traders. It refers to the investment strategy of trading an asset against the present market’s movement. Traders using a counter trend trade method may purchase stocks when prices are low with the ultimate goal of selling the stocks once prices rise. In order to determine when the best time to execute a trade will be, counter trend traders often use momentum indicators. Counter trend trading typically produces smaller overall gains.

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