Home » Articles » What Is Trend Trading

What is trend trading?

How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us

Publish Date: December 06th, 2019

By: Sandhya Kannan, Head – Content

Trend trading is a trading style based on the assumption that an asset’s momentum in any direction will hold for a period. A trend is simply the movement of the asset's price in a given direction. For example, an upward trend would see the price of an asset rise above a prior swing low or support price. One would see higher swing highs and higher swing lows showing that despite the oscillation in the price, it is trending upward. A trader would take a long position in case of an upward trend and a short position in case of a downward trend.

How does trend trading work?

Trend trading is a strategy that can be applied to any asset class. Trends are seen in share markets, foreign exchange, and other assets as well. Identical strategies can be applied across the markets to a great effect.

1. The direction of a sustained trend

2. An entry point

3. A stop-loss to cut losses if the trend reverses

4. A take-profit to book profits when the trend reverses

Once you combine these components with a good risk management strategy, you will be able to make profits in the long run. However, it is important to remember that executing a trend trading strategy requires that you stick to the plan. Many times the trend you invest in may not come to fruition, but you will be able to book enough profits when you were right to make up for these.


Many different indicators can be used to identify trends in stock trading. Price action is the most common indicator used for this purpose. A trader would usually use the support and resistance level to set the stop-loss levels. For example, in an upward trend the stop-loss would be just below the support level and in a downward trend, it would be just above a resistance level. Various stock charts are also used for the same.

Other indicators that can be used are:

Moving averages

A trader can choose to take a long position when a short-term moving average becomes higher than the long-term moving average. A short position is taken when the short-term moving average falls below the long-term moving average. It is advisable to combine a moving average strategy with price action. This is so because moving averages can give misleading information when no trend is present.

Momentum indicators

One of the most popular momentum indicators used in stock trading is a relative strength index (RSI). A trader could decide to take a long position when RSI drops below 30 and raises back up. If the trend holds, the signal to exit would be when RSI rises above 70 and falls back down.

When executed with discipline, trend trading can provide exciting results for investors in the share markets.