Trend trading
Trading in the direction of an established trend, and staying in while it lasts. The idea is to follow the market, not to predict its turns.
What trend trading is.
Following a move in one direction, rather than guessing where it ends.
A trend is a sustained move in one direction. In an uptrend, price makes higher highs and higher lows. In a downtrend, it makes lower highs and lower lows.
Trend traders buy in uptrends and sell in downtrends. They do not try to pick the top or the bottom. They wait for the trend to show itself, then follow it.
Trend trading is an approach, not a timeframe. A day trader, a swing trader and a position trader can all trade with the trend.
How to spot a trend.
Four ways traders judge whether a market is trending.
Highs and lows.
The plainest test. Higher highs and higher lows describe an uptrend. When price makes a lower low, the uptrend is in question.
Trend lines.
A line joining two or more rising lows in an uptrend, or falling highs in a downtrend. Price staying on the right side of it supports the trend.
Moving averages.
Price above a rising moving average describes an uptrend. Some traders watch whether a 50-period average sits above or below a 200-period one.
Trend strength.
The ADX rates how strong a trend is from 0 to 100, without saying which way. Many traders treat a reading above about 25 as a trending market.
How a trend trade works.
Five steps, from finding the trend to letting it end the trade.
Identify the trend.
Use a higher timeframe to find the direction, such as the daily chart for a trade taken on the 4-hour.
Wait for an entry.
Enter on a pullback to support or a moving average, or on a break to a new high in an uptrend.
Place the stop.
Put it beyond the last swing low in an uptrend, or beyond the last swing high in a downtrend.
Trail the stop.
As the trend makes new swings, move the stop behind each new swing low. Never move it further away from price.
Let the trend end the trade.
Exit when the trailing stop is hit, or when the pattern of highs and lows breaks.
A worked example.
Suppose you buy a stock index CFD at 5,000, sized at $1 a point, and trail your stop below each new swing low.
| Index level | Stop at | Locked in | |
|---|---|---|---|
| Entry | 5,000 | 4,900 | −100 points ($100 at risk) |
| After the first new swing low | 5,200 | 5,080 | +80 points |
| After the second new swing low, at the high | 5,400 | 5,300 | +300 points |
| Pullback hits the stop | 5,300 | Closed | +300 points, or $300 before costs |
The trade gave back 100 points from the high of 5,400. That is normal for trend trading: the exit comes after the trend turns, not at the top.
Costs come off the result. You pay the spread on entry, and swap for each night the position is held.
The same method can lose several times in a row when the market moves sideways. Trend traders aim to keep each of those losses small. A trend large enough to cover them may not come.
Common mistakes.
Where traders new to trend trading most often go wrong.
Calling the top. Selling a strong uptrend because it looks too high goes against the whole approach.
Trading trend signals in a sideways market. Crossovers and breakouts whipsaw back and forth in a range.
Moving the stop away from price. A trailing stop only ever moves in the direction of the trade.
Taking profits too early. The approach relies on the larger moves to cover the smaller losses.
Chasing a long run. Buying far above support leaves a wide gap to any sensible stop.
Trend trading on MetaTrader 5.
The averages, lines and trailing stops are built into MT5. Some steps below are on the desktop app.
Add two moving averages.
Go to Insert, then Indicators, then Trend, then Moving Average. Add one with a period of 50 and one with 200.
Draw a trend line.
Choose Insert, then Objects, then Lines, then Trendline. Join two rising lows, or two falling highs.
Set a trailing stop.
On desktop, right-click an open position in the Trade tab of the Toolbox, choose Trailing Stop, and pick a distance.
Know its limit.
MT5’s trailing stop runs in your terminal, so it only works while the platform is open and connected. Some traders move the stop by hand instead.
Questions, answered.
What traders ask most about trend trading.
01Is trend trading the same as momentum trading?
02How do I know a trend has ended?
03What timeframe is best for trend trading?
04What happens when the market moves sideways?
05Can I practise trend trading first?
Practise it on a demo.
Mark a trend, trail a stop and follow it through on a free MT5 demo before you trade with real money.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.