What is Trend Trading? - Lightspeed

Introduction

Trend Trading is a style of trading in which the investor aims to acquire profits by determining the widespread trend of an asset as it moves in a particular direction. The trader analyzes data to decide whether the stock may continue to move (up or down) for a specified amount of time. Strategies and tools are used to effectively identify and track a trend's direction. These include the tracking of key indicators through charting programs that assist investors as they monitor the trend. Trend trading also incorporates the creation of profit/loss contingencies, such as take-profit and/or stop-loss orders if the trend reverses. Expand your knowledge of trend trading through this blog, which outlines the steps to getting started and subsequently building on strategies to serve as powerful tools in your investment repertoire.

How to get started in Trend Trading

Identify a Trend: Traders should first use charting programs such as the Lightspeed Trader software to identify whether a stock consecutively moves up or down in a series of highs or lows. While there is no infallible indicator that guarantees profits, there are key indicators that are consistently used by trend traders. Price action is used to determine the volatility of the stock in the upward or downward direction. For example, if a stock consistently moves upward in a succession of highs greater than the last, it is identified as an uptrend. The range of how high or low, and in what time frame, must also be considered when analyzing market trends. Support and resistance levels illustrate the top or bottom of the range, which provides essential data for determining whether there is a possibility of stagnation or trend reversal.

Tracking the Trend: Traders must distinguish between a pullback and a reversal when tracking the trend. A pullback is a temporary stop in the up or down trend. Here, the stock is still moving in the trend direction, but there is a question as to whether the slowdown indicates a permanent reversal of the trend. In this case, investors use indicators to determine the cause of the pullback before deciding whether this is a permanent reversal. A reversal is a turnaround in the stock in the other direction, which can happen quickly or over a long period of time. Traders can then compare the price movement of the individual security with the overall market to confirm a trend. Key indicators of the market, such as the Dow Jones, S&P 500, and NASDAQ indices, can be used as a baseline to compare an individual security with market trends.

Minimizing Risk: Contingencies such as take-profit (limit order that specifies the exact price at which to close out the position for a profit) and/or stop-loss (if the stock falls to the stop-loss point, the position is closed for a loss) orders can be put into place to capture small gains and/or limit large losses if the trend reverses. In the next section, we will discuss key indicators that can support the investor in making decisions about the stock trend.

To Summarize:

• Trend Trading strategies detect uptrends and downtrends that consistently move in a succession of higher highs or lower lows.

• Price Action is a strategy used to identify overall highs and lows.

• Distinguish pullbacks and reversals to determine temporary or permanent changes in the trend.

• Traders must compare the security with the overall market when confirming a trend.

• Although there is no guaranteed method to yield returns, certain indicators are favored by trend traders.

• Support and resistance levels illustrate the top or bottom of the range.

The Most Common Trend Trading Indicators:

When participating in trend trading, one must identify key indicators that will buttress the identification and movement of the trend. These indicators are outlined below and may prove invaluable to investors in their analysis.

Moving Averages: Chart indicators that display the average price over a specified period of time. Analyzing the summation of closing prices divided by the total period provides traders with data that assists in determining the fate of the trend. Here, the stock is compared with the average price over that period of time.

Moving Average Convergence Divergence: Interprets the moving average by showing the direction of the movement and whether it is higher or lower than the average.

Relative Strength Index: Detects the speed and extent of the stock price change to assess overvalued and undervalued circumstances in the security price.

On-Balance Volume: Technical indicator intended to relate price and volume.

Volume Weighted Average: If more trades are going at a certain price level than others then it is more significant as a value when analyzing a trend.

Risks of Trend Trading:

Even with risk management contingencies in place, there are some risks the investor should heed when trend trading.

False Signals/Reversals: As previously mentioned, a pullback is a temporary halt in the trend that is not permanent but leads the investor to believe that the trend will reverse.

Lagging Indicators: Moving averages may not necessarily offer precise data for the current market.

Paradigm Shift: A reversal in the trend that can happen quickly or over a long period of time. For example, earnings data or government economic reports can impact valuations or projections.

Options Risk Disclosure:

Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Options trading subject to eligibility requirements.

Active Trading with Lightspeed:

Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or to open an account.