When it comes to trading on financial markets, traders have many options in terms of their style of trading. This can be confusing for newer traders as to which option is best suited to meet the needs of their specific situation. Some traders like to trade for shorter periods, while others are happy to trade for longer time frames (week to month). Being able to clearly identify the difference between each type of trader will allow you to build a trading strategy that fits your personality type as well as the goals that you have set for yourself financially.<\/p>\n
A misunderstanding that is often found among traders is Trend Trading vs Trend Following these two phrases are very similar but have different meanings. Both strategies seek to make money off of the direction of the current trend in the market, but each has its own method of identifying, controlling, and closing out of the trade. The purpose of this guide will be to provide simple explanations of each option so you are able to understand what the strengths and weaknesses of each option are and when you would want to utilize either method for income generation.<\/p>\n
Trend Trading, as the name suggests, involves buying and selling according to the direction of an active trend\u00a0 or to put it another way, once you’ve identified an active trend, you’ll want to purchase or sell assets accordingly during that time until that particular trend comes to an end. The primary goal of trend trading is to profit from the price movement of a security while having already determined whether to buy (on upward’s) or sell (on downward’s) before that trend has ended.<\/p>\n
A good example would be to use the analogy of watching a cyclist go down a hill. If you were to meet up with them halfway down and chose a good point to start, you will essentially be cycling with the cyclist for the remainder of their ride. In much the same way, trend traders do not usually try to determine which direction the price will move in the future. Instead, trend traders will look for confirmation of the current trend before initiating any trades.<\/p>\n
The moving average indicator<\/strong><\/a> is one of the key indicators used by many trend traders. it allows traders to use an average price calculated over a given period to eliminate the normal fluctuations in price fluctuations and determine if the overall direction of the prices is moving up or down. Although any technical indicator can contain faults, using either candlestick patterns or price action combined with the moving average, generally gives traders a better quality decision regarding trends.<\/p>\n Additionally, trend traders often examine support and resistance areas, trend lines and volumes to gauge whether or not a trend is strong or losing momentum. Together, these three areas help most trend traders determine whether there is momentum for the trend or there is a down trend.<\/p>\n Many traders also study candlestick trading because every candle created has a certain look and characteristics about it (i.e. bullish engulfing candle) that may be able to help illustrate the shift between buyers and sellers (and back) before a trader enters a position.<\/p>\n There is an array of holding times for trend trading\u00a0 anywhere from as little as an hour to multiple days depending on other factors that influence the market and trends. Due to the numerous holding periods associated with trend trading many traders are attracted to trend trading given the wide range of holding periods.<\/p>\n Similar to trend trading, trend following attempts to derive profits from trades based on market trends, but has a different philosophy. Where trend traders attempt to obtain profit from only part of the trend; trend followers will attempt to remain in the trade for as long as the trend is in play\u00a0 assuming that they are willing to maintain their trade through temporary pullbacks.<\/p>\n Think of a trend following trade as being like planting a tree, versus harvesting fruit on a fruit stall.Neither way takes time; however if you have a tree that grows, your potential returns are proportional to how much longer you allow your tree to grow.<\/p>\n Trend followers view the “big picture,” rather than reacting to every small price move in the market. Their view of price trends is that they seldom move in a straight line. Temporary corrections along the way of a healthy trending market are considered as normal events during that trend, rather than an indication that you should exit.<\/p>\n This method of trading is often based on larger analyses of the overall market and use of momentum to help assess the strength of existing trends and whether they are diminishing. “Market Momentum in Forex<\/strong><\/a>” can assist traders with determining how strong of a trend exists and whether it will continue as is. In general, if the market has strong momentum, the trader will be advised to remain in the trade; if the market is experiencing a decline in its momentum, traders will typically proceed more cautiously.<\/p>\n Trend following traders typically will ignore daily market fluctuations or fluctuations that may seem strange because they are more interested in the long-term direction of the market as a whole.<\/p>\n It is critical that traders practice self-discipline when following this form of trading. Exiting trade positions too soon can preclude them from being in the position to take advantage of the many long-term movements in a trending market. On the other hand, exiting trade positions too late can create significant losses. Successful trend-followers learn how to establish rules\/restrictions (and stick with them), rather than using their emotions as their guiding force.<\/p>\n Although these strategies appear similar at first glance, they differ in several important ways. The biggest distinction lies in how traders think about trends.<\/p>\n Trend traders often seek opportunities within an existing trend and may enter and exit multiple times as conditions change. Trend followers, however, usually aim to enter once and remain invested until objective evidence suggests the trend has truly ended.<\/p>\n Another major difference is patience. Trend trading often involves more frequent decisions and closer market monitoring. Trend following generally requires greater patience and confidence in long-term market direction.<\/p>\n Risk management also differs. Trend traders frequently use tighter stop-loss levels because their trades target shorter market moves. Trend followers usually allow wider price fluctuations, accepting temporary pullbacks in exchange for larger potential gains.<\/p>\n The trading tools can overlap, but their purpose often changes. Moving averages, trendlines, and momentum indicators may be used by both strategies, yet the interpretation depends on whether the trader is focusing on short-term opportunities or long-term market direction.<\/p>\n Successful trading is one of the key differentiators between who makes money trading on the market vs. those who do not. One of the biggest reasons for this difference can be attributed to having a solid well-defined plan of action outlining how a trader will enter and exit their trades. Even the strongest trend can lead to losses if they are not executed with discipline.<\/p>\n Trend traders typically wait for the price to pull back before entering, while trend investors prefer to buy after the price has pulled back and then subsequently sells on the first rally in the opposite direction.<\/p>\n In addition to using technical confirmation, trend traders also use several other indicators to help determine when they should enter and exit a trade. Some of those indicators include things like moving averages and trend lines, or other commonly used types of indicators.<\/p>\n When it comes to exit strategy, trend traders often use either profit targets or trailing stops. Once they notice that momentum has started to slow down or that technical signals are not there to help support their current position, they typically will take their profits off the table rather than hope that the trend will continue for an indefinite amount of time.<\/p>\n Trend followers take a different approach to replenish their trading accounts than trend traders do. Trend followers usually wait for a reliable signal that confirms that they are in a strong trend before they will re-enter the market. Trend followers are typically looking to be in the trade longer than trend traders and, therefore, will not constantly be making small adjustments (short term adjustments) to their positions.<\/p>\n Since trend followers hold their positions longer than trend traders, trend followers do not make constant updates to their accounts. Trend followers would expect to see small price fluctuations and will not make changes to their open trades merely because there has been a few days of extreme volatility or large swings on the price of the underlying asset.<\/p>\nWhat Is Trend Following?<\/h2>\n
Key Differences Between the Two Approaches<\/strong><\/h2>\n
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\n Feature<\/td>\n Trend Trading<\/td>\n Trend Following<\/td>\n<\/tr>\n \n Primary Goal<\/td>\n Capture part of a trend<\/td>\n Capture the majority of a trend<\/td>\n<\/tr>\n \n Holding Period<\/td>\n Hours to days<\/td>\n Days to months<\/td>\n<\/tr>\n \n Trading Frequency<\/td>\n Higher<\/td>\n Lower<\/td>\n<\/tr>\n \n Decision Speed<\/td>\n Faster<\/td>\n More patient<\/td>\n<\/tr>\n \n Stop Loss<\/td>\n Usually tighter<\/td>\n Usually wider<\/td>\n<\/tr>\n \n Market Monitoring<\/td>\n Frequent<\/td>\n Less frequent<\/td>\n<\/tr>\n \n Suitable For<\/td>\n Active traders<\/td>\n Patient traders<\/td>\n<\/tr>\n \n Emotional Challenge<\/td>\n Quick decision-making<\/td>\n Holding through pullbacks<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n Entry and Exit Techniques<\/strong><\/h2>\n