Trend following strategies are among the most time-tested methods in the trading world. Instead of trying to predict the tops and bottoms of the market, these strategies focus on harnessing the momentum of established trends.
In this blog, we will look at popular trend following strategies, find out how they work and when they are most effective, as well as learn about the tools that DotBig exchange offers.
What is Trend Trading?
Trend trading is a strategy that assumes that market players analyze the direction of trends in financial tools. When an asset shows an uptrend, traders often seek to open a long position and buy. In the opposite scenario, when the direction is down, they open short positions and sell.
The trend following strategy is based on the expectation that the value direction will remain in its current form and the trend will not reverse. Thus, if you are trading in an uptrend, you can continue to hold your long position and watch the asset’s value rise, while you can decide to sell your asset if the trend is downward.
Short-Term and Long-Term Trend Trading
Short-term traders, such as day traders, monitor trends that occur during the day in short periods to try to capitalize on short-term price fluctuations. There are many popular strategies that intraday players prefer to use, such as scalping, as well as individual strategies for following the intraday trend. Tracking an intraday trend consists of analyzing short-term fluctuations and price movements. For example, if there is an uptrend during the day, consisting of a series of movements that create higher relative highs and lows, then traders can set a trailing stop before the low and then at the next higher low in the trend, in case the trend suddenly reverses.
Long-term trading involves holding a position for longer periods, often in an uptrend. It may take several weeks, months, or even years. Long-term market participants make decisions based on deep fundamental analysis, which mainly focuses on how the market will look in the future. When it comes to market analysis, long-term DotBig broker traders worry less about daily trend fluctuations and focus more on the long-term trend and its influencing factors.
Top-5 Trend Following Strategies by DotBig Experts
Below, there are five proven trend strategies recommended by DotBig Forex experts:
- Moving Average Crossover method
This is a popular day-trading method coming with two moving averages: a short-term and a long-term one. A signal arrives at the moment when the short-term moving average crosses the long-term point above or below. For example, the 50-day moving average crossover above the 200-day moving average may show the beginning of an uptrend.
This strategy is popular as it smooths out price fluctuations and provides clear entry and exit points.
- Breakout Trading
Breakout strategies are aimed at capitalizing on prices that go beyond a certain level of support or resistance. When the market breaks above resistance, it is often a signal of the beginning of a bullish trend. Similarly, a break below the support may indicate a downtrend.
Successful breakout players mainly wait for confirmation — for example, strong volume — to avoid false breakouts. This method is particularly effective in highly liquid markets.
- Price movement by the trend
This strategy involves analyzing the net price movement without relying on indicators. Traders are looking for higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend. Patterns such as flags, pennants, and trend lines are used to identify inputs and outputs.
This type of trading requires excellent chart reading skills, but it provides a clear view of market behavior, making it a reliable option for those who follow the trend.
- Donchian Channel method
The Donchian Channel tracks the highest high and lowest low for the selected time interval. A break above the upper band signals a long trade, and a break below the lower band signals a short one. This strategy helps users enter positions when the markets are showing strong directional movement.
This is a classic example of following a rule-based trend, popular among futures and commodities traders.
- Confirmation of the Relative Strength Index (RSI)
Although the RSI is often considered a tool for returning to the average, it can also be used to confirm trends. In trend following methods, traders use the RSI to check for confirmation of trend strength. For example, in an uptrend, RSI readings remaining above 50 indicate that the bullish momentum is intact.
Combining the RSI with other indicators such as moving averages can improve accuracy and reduce the number of false signals.
Trend Trading: common tips
According to DotBig reviews, while trend trading, estimate the volume at the moment of the trend breakdown. If after the breakdown there is an increase (or fall) of at least 3% from the previous Close price, then most likely the breakdown is true and a reversal is inevitable. Therefore, volume indicators are indispensable components of a profitable trend strategy.
While there is no obvious trend, trade inside the channel. A strong trend is observed in the market in about 30-40% of the total trading time (and even less on some assets), therefore, channel trading skills are necessary for every trader. With a sufficient range width and a reasonable approach to risk, trading to break away from the channel boundaries can bring income no less than any other strategy.
Using a trend strategy requires the ability to “see the trend” and build trend lines correctly. If you do not trust your vision, it is recommended to use special indicators offered by DotBig site. Trend trading has the highest profit potential, but in order to take it out of the market, in addition to a successful entry, you also need to be able to keep the profit and not fix it too early.
Use DotBig Toolkit to Build an Effective Strategy
The DotBig trading platform has an excellent reputation and is suitable for both beginners and experienced traders. On the website you will find the right tools to trade on the markets and earn money.
- Trading signals. The company provides tips for novice traders with the appropriate time to open/close trades. Signal providers take into account the news background, archived data, and the results of fundamental and technical analysis.
- Online advisors and robots. Programs of the first type generate hints on the time of transactions, asset selection and lot volume. DotBig investments robots make deals on their own, while it is enough for a trader to simply monitor the program and receive passive income.
- Social trading. The broker provides a service, where users can copy the transactions of successful investors. When forming a rating of the best traders, the number of profitable trades in their trading history is taken into account.