Trend Trading - what does this mean?
Trend trading, as its name implies, is concerned with trading market trends – and employs systems designed to signal when a trend may be commencing. These systems need to keep you in the market until the end of the trend is indicated.
On a day to day basis, market prices can’t do very much. They can only go up, go down or stay where they are. Whenever a market moves in certain ways, it becomes of interest to trend traders. That means most traders because pretty well all traders are trend traders and certainly the successful ones are.
Most of the time, market prices are just shuffling around, going nowhere in particular. There is no money to be made in these conditions and traders want to stay out of these directionless markets.
In contrast to stocks , all commodity traders can trade successfully when markets are going down as well as when they are going up. This produces a high proportion of suitable market trading conditions.
Commodity trading is an important part of global economic structure and it is healthy for prices to fall as well as rise.
Who can say whether it is good for the price of copper to rise or fall at any time? If you are a copper producer you may welcome an upward move in the price whereas if you are a cable manufacturer you may not. Either event is entirely natural and trend traders happily become involved in both of these situations.
Whatever the direction of the market, the trading process is the same - except that when markets are falling, you sell to open a trade and buy to close it. In all cases you subtract the buy price from the sell price to establish the gross trading profit margin.
How do trend trading systems work?
Every trend trading system has a way of detecting the possible beginning of a trend and producing a market entry signal.
One definition of a trend is seen when a market price makes a succession of ‘higher lows’ (indicating an upward or long trend) – or a succession of lower highs indicating a downward (short) trend. A trend following system may use this information to generate its buy and sell signals to enter the market.
Another popular way of finding the beginning and end of a trend employs moving averages of differing numbers of time intervals. Signals are generated when these moving average lines cross each other.
It has already been pointed out that virtually all commodity trading systems are designed to detect and follow trends and there are a vast variety of ways this can be done. That means there is vast scope for creating different system rules.
Part of the system trader’s essential work is to provide system rules (which may be created by the trader himself) but his most important duty is to put in place the trading methods within which the rules will operate. Major tasks carried out by the trading method are what are known as trade management tasks - to maximize trading gains and control the trader’s exposure to risk.
Copyright David Bromley 2006
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