Trend Trading

One of the most common trading styles in Trend Trading. This is essentially taking a position in the market with the predominating trend. So over the specific timeframe you are interested in, you either join the uptrend or join the downtrend.

Trend trading has been around for hundreds if not thousands of years. It is sometimes used in conjunction with trading cycles. The belief behind both trend trading and cycle trading is that prices move in a particular direction for a period of time before changing direction. A trend can be on any timeframe you like from a one minute trend to a multi-decade trend. There are very few people who do not believe that markets prices trend.

You have probably heard the saying:

The trend is your friend.

Or:

The trend is your friend, until the end, when it bends!

One of the first people do research and document trend trading was Charles Dow who developed the Dow Theory well over 100 years ago.

Since then there have been hundreds of proponents of some type of trend trading system or another.

As I outlined on the page www.tradingbook.org/your-personality it partly depends on your personality whether trading the trend is something you feel comfortable doing.

For me, it perfectly suits my personality.

I like to try to identify trending markets and just like an escalator I like to ride up when the trend is up and ride down when the trend is down.

It is my belief that no-one can know every factor that moves market prices, in fact nowhere near every factor. But whatever forces are at work buying and selling, will by definition show up in the price. Also it is apparent to me that the strong emotions of fear and greed often push market prices well above and well below equilibrium levels. Being a trend trader allows me to ride these prices in either direction without having to figure out what is going on in the minds of other market players.

Let me give you an example. For argument’s sake assume the Chinese government has realized it does not have enough Soybean Oil for the needs of its population. It cannot afford to tell the market this because that would immediately lift the price of Soybean Oil. Similarly it cannot simply buy every contract available because this would also dramatically increase the price in a short time. What is has to do is slowly and quietly start buying Soybean Oil contracts. So the price of Soybean Oil starts to rise. As a trend trader I notice this and at a certain point my trading model tells me to buy contracts. My trading model forces me to hold these contracts as the price continues to climb. I can only get out if and when the price reverses. Such massive buying from the world’s biggest consumer of Soybean Oil is likely to lift and support Soybean Oil prices for weeks if not months. I might never know what caused the price rise or I might find out months later, but that is irrelevant. I have joined the trend, and profited.

Of course trend trading is only one type of trading, and even within trend trading there are dozens of different systems which use different timeframes and different entry points.

And some fantastically successful traders do not trend trade at all. One of my market heroes is Fund Manager Paul Tudor Jones. This is a quote from him:

“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

If you are interested in trend trading I recommend the following books:

 

 

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