Trading trend

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Trading trend

'The trend is your friend'. You'll often hear this said by marketers – and for very good reason. Here, we look at how trends work in technical analysis, how to identify them, and more.

What is the trend?

Trend is the term for when a given market generally moves in one direction. There are three directions the market can move: up (bullish run), down (bearish run) and sideways (range-bound).

We covered trend trading strategies in the Strategy and Risk course. But regardless of the style you choose, learning to identify and classify trends can be a huge help to successful trading.

Trends fall into three main categories:

       The primary (or basic) trend describes the main direction of market movement over a long period of time, from several months to several years.
       Intermediate (or secondary) trends occur within larger trends when the market moves in a specific direction over a short period of time.
       A minor trend will appear over a very short period of time – usually less than a day

Examples of trend types

For example, a market that has increased significantly over the past 18 months is in a major uptrend. However, during this bull run, the market may be range-bound for several weeks or months before continuing the rally. This will create an intermediate trend.

And on any given day, a modest price increase or decrease is possible.

How to trade with the trend

The type of trend you will see when trading will depend on the strategy you choose.

Long-term investors, such as position traders, look for underlying trends. This way, they can capture big moves to earn the big profits they need for their business. Intermediate-term traders, such as trend traders, may try to capture secondary trends that last from a few days to a few weeks. On the other hand, day traders and swing traders will only focus on small trends.

There is a contrasting perspective

You don't always have to trade with the prevailing trend – in fact, many investors do the opposite. Instead of following the general direction of the market, these contrarians take a contrary view, hoping to profit from the upcoming reversal.

Whatever your approach to the markets, the difference between success and failure often comes down to how well you can adjust your bias. If you can open positions as they are formed - then close them before they are reversed - you will soon see your profit margins increase.