What is trend trading?

As suggested by the name, this involves trading trends and, like other methods of trading, using certain indicators to know when to enter or exit a market. But what exactly does it mean to trade trends?

Most people are familiar with the term 'trend' which is essentially the current direction or development of a particular concept. It can be applied to style, schools of thought, paradigms and even financial markets.

When trend trading, traders look to identify the market direction and aim to enter positions to make a profit on increases or decreases in price. While it can be said that this is the goal of each type of trading method, there are some key aspects of trend trading that are unique to this approach.

Technical analysis forms the backbone of this type of trading and there are a number of elements that can be used to develop a successful trend trading strategy.

Identifying the types of trends

In trading, there are three general trends in a market:

• Uptrends: These occur when the price of an asset reaches new highs. In this instance, when looking at a chart, you'd see higher high points than previously and higher low points. This is a good indicator that the trend of a market is moving in an upwards direction.
• Downtrends: As the name suggests, these are the opposite of uptrends, occurring when the value of a financial instrument or asset reaches new lows. On a chart, both the high and low points would be lower than previously.
• Sideways trends: These arise when there is balance between support and resistance and supply and demand within a market. While there are strategies that can be specifically applied to this type of market, trend traders tend to focus their methods more on the upward and downward momentums, with the aim of reaping the benefits of a larger profit.