Trend is your friend
If you have been on the market for a while now, you must have heard various words of wisdom concerning the trend. "The trend is your friend", "don't fight the trend", "don't catch a falling knife" - that's what the trading Jedi say about it. So, what's this all about?
Trend following is one of the most popular terms used by binary options traders. It's a basis for the majority of modern investment strategies. Learning it definitely has to be on your must list and in this article we will help you to do it.
What is the trend?
The term ‘trend’ indicates the prevailing direction that the price of an asset has been moving. In other words, it’s the general direction of a market or of the price of a security. It can be detected during various time frames: from a couple of hours till years.
There are 3 states of trending market that can be easily recognised:
- Uptrend - the dominant direction of the price is going upwards.
- Sideways trend - the horizontal price movement that occurs when the forces of supply and demand are nearly equal.
- Downtrend - the dominant direction is going downwards.
Although, fundamental traders check up with the trends sometimes (who look at changes in the company’s revenue, earning and other business metrics), trend mostly forms the basics of technical analysis strategies. Technical traders believe that the past trend will repeat itself in the future. Eventually.
How to trade on the trend?
The most popular way to recognize the trend is by using trend lines. Their function is as simple as it can be - to connect a series of highs and lows into one pattern. Uptrends connect a series of higher lows, creating a key support level for future price movements. Downtrends connect a series of lower highs, creating a key resistance level for future price movements. In addition to support and resistance, these trend lines show the overall direction of the trend.
When we speak of trend, there are various time frames available. However, professional traders prefer to use long-term ones. In binary options trading terms it can be 24-hours charts. With the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) determining the trend won’t be a problem.
Another important factor to be considered is any news releases which can happen during your trading session. News flow is almost unpredictable in the terms of trend and can easily disrupt a daily trend.
Professional traders agree that what works the best in trend trading is a combination of technical indicators with different functions. Each combination can be assembled and adjusted to suit your trading goals and preferences. With a proper testing and a bit of courage, you will get your personal working strategy.