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Diversified Trend Trading Approach

Forex traders use forex signals to determine which forex pair to trade, whether to buy or sell it and when to enter or exit the market. Traders may also use forex signals to identify trends in the forex market to help them make profitable trades.

Trend Trading: What is it?

Trend trading can be defined as a trading strategy or a trading style that analyzes an asset's momentum in a particular direction. A trend trading strategy tries to make profits in the market by identifying a persistent price move that is likely to continue moving in the same direction.

Though most people consider trend trading as a mid to long-term trading strategy, it can cover any timeframe, depending on how long a trend lasts. Trend trading strategies do not seek to identify the market direction, but they react to current market conditions that display persistent price behavior.

It is mostly favored by traders who prefer a swing trading or position trading style. Swing traders identify a trend and ride it from start to finish, while position traders hold a trade for the entire duration of a prevailing trend, regardless of day-to-day fluctuations. Once the trader identifies such a condition in the forex market, they follow the market trend till the time price action clearly shows signs of waning.

How can you identify a trend?

Trends can be segregated into three types- uptrends, downtrends, and sideways trends.

When the market price increases in value, it is an uptrend, and when it decreases in value, it is a downtrend. A sideways trend is when a market price is neither reaching higher price points or lower.

Trend trading strategies help you identify market trends as early as possible and exit the market before they reverse. Various factors like opening price, closing price, and the trading range can provide traders with a lot of information to identify a trend.

What are the benefits of trend trading?

If you are a forex trader, then trends are your friends.

Here are a few benefits of trend trading:

· Potential for massive gains

Most trades that traders execute typically net out to breakeven. A majority of the profits are actually realized on just a handful of the trades. When you follow a trend trading strategy, it compels you to stay in a winning position for as long as possible to maximize gains on a particular trade.

· Lower transaction costs

The frequency of trading in and out of positions is quite high in shorter-term scalping, day trading, and even in some swing trading methods. However, trend trading is much more passive. Traders sometimes have to shell out 60% to 70% of their gross returns as transaction costs for high-volume traders. The cost associated with trend trading is quite nominal in comparison.

· Reduced time commitment

Most trend trading approaches are built with a longer timeframe in mind. As such, most entry and exit signals are generated using daily or weekly price bars. Hence, the time required to manage a trend trading portfolio is quite minimal.

Why should you choose the Diversified Trend Trading approach?

Diversification is a key ingredient to a successful trend trading program. A single instrument may experience only a small number of significant trends over a defined period. Investors do not have a sure-shot way of determining which market will outperform in the future. Hence, they are better off trading all of the markets at once.

An investor choosing a market to trade at random would have expected to experience a Sharpe ratio of 0.45, while an investor who traded all markets as a diversified trend strategy would have achieved a Sharpe ratio of 0.76. Investors who chose to diversify produced nearly 1.69 times return per unit of risk relative to an investor trading one random market. This means that an investor would have had to be better than 93% accurate in choosing which index to trade in advance to achieve better performance than one could generate from simply diversifying across all of them.

What are the top three trend trading forex signals?

There are several ways to identify primary trends, but the most popular forex signals include:

1. Moving Average: It finds the average price of an asset over a given timeframe.

2. Relative Strength Index: It identifies momentum in prices and overbought or oversold signals.

3. Average Directional Index: It determines the strength of a trend, irrespective of whether it is up and down.

Using the diversified trend trading approach along with various forex signals can help traders make profitable trades consistently.
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