what is trend trading 
trend trading is a trading style that attempts to capture gains through the analysis of an asset s momentum in a particular direction when the price is moving in one overall direction such as up or down that is called a trend trend traders enter into a long position when a security is trending upward an uptrend is characterized by higher swing lows and higher swing highs likewise trend traders may opt to enter a short position when an asset is trending lower a downtrend is characterized by lower swing lows and lower swing highs chachamal getty imagesunderstanding trend tradingtrend trading strategies assume that a security will continue to move in the same direction as it is currently trending such strategies often contain a take profit or stop loss provision in order to lock in a profit or avoid big losses if a trend reversal occurs trend trading is used by short intermediate and long term traders traders use both price action and other technical tools to determine the trend direction and when it may be shifting price action traders look at the price movements on a chart for an uptrend they want to see the price move above recent highs and when the price drops it should stay above prior swing lows this shows that even though the price is oscillating up and down the overall trajectory is up the same concept is applied to downtrends with traders watching to see if the price makes overall lower lows and lower highs when that is no longer happening the downtrend is in question or over and the trend trader will no longer be interested in holding a short position trend trading strategiesthere are many different trend trading strategies each using a variety of indicators and price action methods for all strategies a stop loss should be used to manage risk for an uptrend a stop loss is placed below a swing low that occurred prior to entry or below another support level for a downtrend and a short position a stop loss is often placed just above a prior swing high or above another resistance level oftentimes traders use a combination of these strategies when looking for trend trading opportunities a trader might look for a breakout through a resistance level to indicate a move higher may be starting but only enter into a trade if the price is trading above a specific moving average these strategies involve entering a long position when a short term moving average crosses above a longer term moving average or entering a short position when a short term moving average crosses below a longer term moving average alternatively some traders may watch for when the price crosses above a moving average to signal a long position or when the price crosses below the average to signal a short position typically moving average strategies are combined with some other form of technical analysis to filter out the signals this may include looking at price action to determine the trend since moving averages provide very poor signals when no trend is present the price just whipsaws back and forth across the moving average moving averages are also used for analysis when the price is above a moving average it helps to indicate that an uptrend may be present when the price is below the moving average it helps to indicate that a downtrend may be present there are many momentum indicators and strategies in regards to trend trading an example might include looking for an uptrend and then using the relative strength index rsi to signal entries and exits for example a trader may wait for the rsi to drop below 30 and then rise above it this could signal a long position assuming the overall uptrend remains intact the indicator is showing that the price pulled back but is now starting to rise again in alignment with the overall uptrend the trader could potentially exit when the rsi rises above 70 or 80 and then falls back below the selected level a trendline is a line drawn along swing lows in an uptrend or along swing highs in a downtrend it shows a possible area where the price may pull back in the future some traders also opt to buy during an uptrend when the price pulls back and then bounces higher off of a rising trendline a strategy of buying the dip similarly some traders elect to short during a downtrend when the price rises to and then falls away from a declining trendline trend traders will also watch for chart patterns such as flags or triangles which indicate the potential continuation of a trend for example if the price is rising aggressively and then forms a flag or triangle a trend trader will watch for the price to break out of the pattern to signal a continuation of the uptrend trend trading chart examplethe following alibaba group chart shows several examples of how trends can be analyzed as well as some examples of potential trades using chart patterns and the trend image by sabrina jiang investopedia 2021the price starts out in a downtrend before rising through the descending trendline and above the moving average this doesn t mean the trend is up though trend traders will typically wait for the price to also make a higher swing high and a higher swing low before considering the trend up the price continues to move higher confirming the new uptrend it then pulls back and starts to rise again forming the first chart pattern the price breaks higher out of the chart pattern signaling a potential long position the uptrend continues aggressively forming two additional chart patterns along the way these both offered opportunities to enter a long position or add to an existing one called pyramiding the price continues to rise but then starts giving warning signs the price drops below the moving average for the first time in a long while it also creates a lower swing low and breaks through a short term rising trendline the price makes a new high after that but then drops below the moving average again this is not strong uptrend behavior and trend traders would typically avoid going long during conditions like this they would also be looking to exit any remaining longs they may have the chart shows that the price continues to oscillate around the moving average with no clear trend direction finally the price slides into a downtrend trend traders would be out of longs and avoiding new ones and possibly looking for spots to enter short positions 