There are a group of traders who specifically look for opportunities when a market shows signs of trending in a particular direction. They try to identify those times when momentum is building in a market on one side rather than another. Typically this comes when a financial instrument breaks out of a range after a period of consolidation and as sentiment turns increasingly positive (for a “buy” trade) or negative (for a “sell”). It doesn’t matter whether the direction is up or down as a trend trader only wants to establish that a market looks set to move broadly in a particular direction over a period of time. This can be short, medium or longer-term.
Once the position is placed, the trader will then run it until there is evidence to show that the trend has run its course. Strictly speaking, trend traders put aside market fundamentals and instead concentrate on price action alone. They often use specific drawing tools and/or technical indicators to help them decide when a trend is establishing, and if so, which direction is it going in?
For instance, the Directional Movement Indicator is useful for signalling if a market is ranging or trending. Then a drawing tool such as Andrews’ Pitchfork can be used to establish the likely direction and strength of a trend together with lines of support and resistance. These can help to establish when a trend has run its course. As with any strategy, risk and money management is important with trend trading. In contrast to day traders, trend traders are prepared to put up more risk capital per trade, but aim for a bigger percentage return.