May 23, 2024


Profitable business

Pros and Cons of Trend Trading Strategy

3 min read
Designing a Trading System- III - TheLiveTradeRoom

Participation in Forex trading significantly increases the chance to secure financial freedom. Forex has a good reputation that it offers quick profit to the traders. Another truth is that just like any other marketplace, it is also competitive and complex.

If you want to gain consistent success in this market, you need to understand the market very well, and you need to develop a very effective trading strategy. In numerous ways, a trader can conduct trading in a foreign exchange market. So, a trader should choose an appropriate trading approach according to his experience level, goals, and context. 

Trend Trading

One of the simple and most reliable Forex strategies is trend trading. According to the name, trading in the current price trend direction is the central concept of this strategy. Making the trade effectively in the right direction is not that easy. A trader needs to identify the trend direction, duration, and strength to do work effectively. All these factors check out how strong the current trend is and when the market can reverse.

A trader doesn’t need to know the exact reversal point while dealing with the futures market. They only need to see when they should exist from their position to earn profit and limit their losses.

Even when trending is running in the market, a slight fluctuation in price may occur against the current trend. For this reason, position trading is a more long-term approach which is preferable to trend trading. A trader should prepare for a slight loss when he invests in the strong trend direction. Moreover, he should know that traders’ profits will surpass his losses if the overreached trend has sustained.

Table of Contents

Tools Used

Traders often use the exponential moving averages and simple moving averages tools to determine the current trend’s strength and direction. Simple and exponential moving averages include the methods such as MACD (Moving Average Convergence/divergence) and ADX (Average Directional Index).

Lagging indicators have been used in all the moving averages to lend the current trading conditions using the past price movement. Moreover, a trader can also use the moving average to indicate the levels of support and resistance. Again, an investor can get the current trend’s strength and insights using MACD and ADX.

A trader gets the reversal signal from this method when the price cannot reach the anticipated support and resistance levels. Again, when the short-term moving average crosses the long-term moving average, an investor also receives a reversal signal. However, the trend traders can exit their current position using these signals rather than anticipating the reversal direction. The trader will begin to trade in the current trend’s order if the new trend manifests again.

Before a price change occurs, a change in price momentum often happens, so the momentum indicators also can identify the exit points. The RSI and Stochastic oscillator are the price momentum indicators. Using these indicators, a trader can determine the oversold or overbought approach of price.

Pros and Cons

Trend trading requires an investor to understand the current situation or what is happening now. Using this strategy, a trader doesn’t require to predict the future or don’t need to predict what will happen next. It is one of the consistent and most reliable strategies for investors.

An investor can trade effectively by confirming the strength and direction of a new trend before taking entry into a trade. Although you are not the first one entering the trading, your unnecessary risk will remove if you keep patience for some time.

There are several Forex trading strategies available in the market, and all the plans come in different sizes and shapes; every system is unique in its way. Before starting with any of them, take a test ride first and then make it final by analyzing all the pros and cons. One of the best strategies is trend trading, and a trader can gain in the long run by using this strategy. | Newsphere by AF themes.