Whether it is Forex, stock, futures, or an ETF; if you trade with the trend you reduce your risk and improve your profitability. It is important to be patient and let the trend run its course.
This is a brief introduction to trading with the trend including information on how it is done, what risks are involved, and why it matters. I hope the post provides a simple guide on how one can improve investment results by following the trend.
Benefits of trading with trend
Reduce Risk :
- When trading with the trend, you will be able to reduce your risk over time, as the market will eventually go up, and thus increasing your capital. However trading against the trend increases your risk as shown in the following picture.
Increase Profitability:
Trading with the trend can increase your profitability if you have good analysis. Trading against trend tends to reduce your profit margins. For example if you buy a stock that is going up and then sell it at a higher price later, you will have no profit margin during that time period.
How to trade with the trend
I will assume that you already have an account with a broker. It is also assumed that you are well versed in technical analysis and can read graphs. To trade with the trend, you should enter when the market is going up, and exit when it starts to go down, or vice versa. In order not to lose money if the market moves against your position, it is important to have stops or exits in place. This method has consequences, however, if you do not conduct good analysis. In this case you will end up losing money in the long run. In addition, you should not trade currencies unless you have a fundamental background on them. You should not trade futures or options unless you are well versed in the risks involved.
Trading with the trend is something that many traders do, but not everyone does it right. It is not easy to know when the market will go up or down. Using your technical skills in analyzing the market can be very useful in trading with the trend, if done properly. Trading with the trend can either make you a lot of money, or it can cost you a lot of money if you do not pay attention and do it right.
What risks are involved?
Trading against the trends tends to fluctuate more than trading with the trends, either due to psychological reasons or economic factors like inflation. You may not get what you bargained for, and your analysis may lead to wrong decisions which might result in financial losses. Additionally, there is the risk of refraining the trend because you might think that it will continue to go up, and thus miss out on high-yielding profits.
However, if there is a strong fundamental basis for an investment such as a commodity or financial instrument such as stocks or ETFs, then trading with the trend can result in risk reduction and therefore increase your chances of a higher profit.
How does it work?
Consider that you bought a stock yesterday at 10$ and paid 5$ for it. Today, the market opens at 12$ and goes up to 15$. You decide to sell the stock, but it keeps going up past 20$, so you decide to hold onto it until it goes down. The market continues to go up until 27$, but the next day it drops all the way down to 8$. Had you sold immediately when the market went up, then you would have made profit. However if you had stuck with the trend, then you would also have made profit.
This process can be repeated to get better results. You can reduce your risk by getting in, and exiting when the market is about to fall so that you take profit before it drops too low. To get even better results, it is important to be patient and let the trend run its course. Its also important to take break before entering again. Eventually, the markets will go back up, but if you do it while they are still up, then that’s not good either because you’ll lose money instead of making profits this time.
Trading with the trend is a good idea if you have good analysis and don’t mind sitting on positions for a longer time frame. You will most likely end up making profit, as long as your analysis is sound, and you don’t mind taking on more risk.
Conclusion
By using the trend you will be able to reduce your risk over time, and thus increase your profit margin. It is important to enter when the market is going up, and exit when it starts to move down. However trading against the trend can result in reducing profits overtime.The most important thing to remember is to know your limits and not over trade. If you are starting out in trend-following, it is recommended that you start off with less risky securities such as high yield stocks and high yield bonds. The above factors are the risks involved when trading against the trend.
I hope that the article has been helpful in trying to understand how one can use trading with the trend for better results. If you have any questions please feel free to leave comments below.
