Trend Trading Strategy: Maximizing Profit and Minimizing Risk

“A good stock at the wrong time, would most surely lead to a negative investment outcome while a bad stock at the right time would very likely lead to a positive investment outcome”

Whatever motive (speculative, investing and or hedging) for participating in the financial market, the concept of trend must be adequately understood and as to fully maximize profit we would want to trade in the direction of the prevailing trend. Timing the entry and exit in any trading asset instrument is of paramount importance as such trend trading strategy is most tool that must be used.

A premise in technical analysis states that “market action moves in trend” and this is why technician says “the trend is your friend”. Market action depicts the behavior of general market participants in any given financial instrument as reflected in the price, volume and or open interest of such instrument. This represented price is expected to move in a directional manner. 

What is market trend and types?

As with the general definition, market trends is simply the general direction an asset is headed. The general direction can be Uptrend where there are successive peaks and troughs, or Downtrend where the price action forms a lower lows and lower highs or Sideways where the price movement fails to make successive highs or lows instead moves in a rectangle manner. 

Charts below gives graphical meaning to the different types of trend.

Classification of trend:

Trend can be classified as;

Primary or major trend represent a movement in a given direction in effect for more than one year. Secondary or intermediate trend represents a correction in the primary trend and usually last three weeks to three months while the minor trend consists of short waves in the secondary trend. 

 

“When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend”.

In the next article, we shall be looking at how to identify a trend and building a trend trading system.

Article by: Adeshina Adetunji, CFTe