Why do trending strategies work?

The trend was and remains the most profitable period of trading on any financial asset, especially for novice traders. Of course, you can consistently make money on a sideways range (flat), in which the market is most of the time, but it is better to wait for a really strong movement and be on the “positive side” as long as possible.

Reasons for trends

In most cases, an impulse for a directed price movement up or down will be a fundamental event: a change in significant macroeconomic indicators or a political situation that directly affects the sphere of production and services. One of the most significant indicators is the interest (discount) rates of central banks and the level of GDP. Their rise or fall causes changes in medium and long-term trends and it becomes possible to make money on the trend with minimal risk.

Trends in the British pound, NASDAQ index and Bitcoin cryptocurrency.

Large players give an initial impulse, and when a new trend becomes obvious to small and medium-sized players, they begin to support it by opening new positions until the potential of buyers / sellers runs out or fundamental events, coupled with market makers, decide to turn the market in the opposite direction or leave into consolidation.

The trend can also be entirely speculative based on rumors and inflated expectations, as happened with cryptocurrencies. The figure shows a sharp rise in the value of Bitcoin in December 2017 – January 2018, associated with the start of trading in the corresponding futures on the CME exchange. When the initial excitement passed and gave way to common sense, the price just as sharply began to decline from a maximum of 20 thousand dollars to the current 4 thousand.

Defining a trend

Defining a trend

The main problem of the trend, which does not have a clear solution, despite the two-century experience of exchange trading, is the determination of the moment of its beginning, and most importantly, of the end. If we add to this the price pullbacks and corrections that occur in the course of the movement, it will become obvious that this type of trading has a large share of subjectivity. What will be the beginning of the trend – several candles in one direction, or a certain number of points of growth / decline? Is the current consolidation the end of the movement or just a “respite”?

The choice of the working timeframe is also of great importance, as can be seen from the example, where an intraday or medium-term trader identifies a flat, scalpers can work out well. You should also take into account average volatility, volume dynamics and other market factors.

Trade trend line breakouts

Despite the listed problems, trend strategies are quite simple and not difficult for beginners. Let’s try to trade trend line breakouts without using additional indicators.

Opening positions on trend line breakouts.

Trend lines are drawn at at least two recent local highs for a downtrend and lows for an upward movement. We will open positions only after a confirmed passage of the price per line, for example, according to the “Breakout of the inclined reversal zone” pattern.

But even without additional confirmation, the strategy gives sufficiently reliable signals to get a positive final result. To increase profits, you can use a trailing stop on strong movements or the “Safe” method to transfer trading to breakeven.