One of the most important assumptions when using technical analysis
is that prices move in trends.
‘Trend following’ is a popular strategy among successful traders because it can help them identify and capitalize on market trends.
This strategy involves analyzing historical data and identifying patterns that indicate a trend is forming, and then buying or selling assets based on that trend.
One of the main advantages of trend following is that it can help traders stay on the right side of the market. By identifying a trend early on and following it,
traders can avoid buying assets at the top of a market cycle, or selling assets at the bottom. This can help them avoid large losses and potentially make bigger profits.
Another advantage of trend following is that it can help traders manage risk. By only buying or selling assets when a trend is confirmed,
traders can reduce their exposure to market volatility. This can help them protect their capital and maximize their returns.
Despite these advantages, trend following also has some disadvantages. One disadvantage is that it can be difficult to identify trends early on.
This can lead to missed opportunities or false signals, which can result in losses.
Another disadvantage is that trend following is a reactive strategy, meaning that traders are only entering a position after a trend has already formed.
This can mean that traders may miss out on early gains, as they are entering the market after the trend has already started to move.
Additionally, trend following can be a difficult strategy to stick to when markets are in a consolidation phase.
This is when markets are not trending in one direction or another, and prices are moving within a range.
During these periods, trend following strategies may produce a lot of false signals and can lead to significant losses.
Overall, trend following is a popular strategy among successful traders because it can help them identify and capitalize on market trends.
However, it also has its disadvantages and can be difficult to implement successfully.
Traders should carefully consider these factors before deciding to use a trend following strategy.
Always remember that ‘The trend is your friend’. If you enter trades in the direction of the trend your risk is greatly reduced.
If you buy in a bull trend, even if prices fall after you enter, eventually the price will turn higher & your trade will return a profit.
Trend lines are an important tool to help identify the trend but should always be combined with other techniques to spot trading opportunities.
(I mainly focus on trend lines, moving averages, Fibonacci retracements, slow stochastic, candle formations & candle patterns).
A trend line is a straight line that connects two or more price points and then extends into the future.
In a bear trend we join the peaks (highs of candles) to identify resistance levels.
In a bull trend we join the troughs (lows of candles) to identify support levels.
The lines which are used to identify levels of support or resistance can be very useful for trade entry and exit.
An uptrend line connects two or more low points in the uptrend & therefore slopes upward.
The second low must therefore be higher than the first for the line to have a positive slope.
Uptrend lines act as support when the market hits a bout of profit taking (with moves to the downside).
The rising trend line indicates that buyers are prepared to pay increasing prices because each successive low is higher than the last.