Trend trading typically involves longer holding periods, does not require constant monitoring of the market, and offers more freedom, making it suitable for most non-professional traders.

Those who are proficient in trend trading often find it easier to capture significant profits, leading to excellent profit outcomes.

Today's article will discuss how to effectively conduct trend trading, with the content mainly covering:

1. Characteristics of trend trading

2. How to choose the time frame

3. How to select the trading instrument

4. Specific methods

1. Characteristics of Trend Trading

Feature 1: Long holding periods with no fixed duration.

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The concept of trend trading is in contrast to swing or intraday trading. As the name suggests, the profit in trend trading lies in capturing the profits from significant trend movements.Therefore, trend trading involves a long holding period, and the length of this period is not subjectively controlled by the trader but depends on the time cycle of the market trend. For example, if you hold a trend trade order and the market trend has not completed after two months, you would have to hold the position for two months.

After bottoming out and rebounding in April 2020, crude oil has maintained an intact bullish trend. If you hold a long position at the daily level, the order should not be closed yet (it has been 14 months).

Feature 2: Trend markets are rare, hence the success rate of trend trading is low, but the reward-to-risk ratio is exceptionally good.

Market trends are divided into trends and consolidations, which is the most basic trading theory, understood by all.

Consolidation markets occupy the vast majority of the time cycles in market trends, but they have a small operating space, while trend markets only occupy a small portion of the time cycles, but they have a large operating space.

Therefore, on candlestick charts, there are more consolidation trends and fewer trend trends. The result of trend trading must be: a low success rate, but a good reward-to-risk ratio.

The two most basic logics of trend trading are:

1. Following the trend.

The most representative is the trading system explained in the book "The Turtle Trading Rules," which are basically trend-following trading systems.For example, the "Tang Qi'an Trend Trading System" involves buying when the price breaks through the 20-day high and selling when it falls below the 20-day low, which allows for continuous position holding to follow the trend.

For instance, in "Trend Trading Method," there is a way to follow the trend using channel lines. When the price breaks through the channel line, one closes the existing position and enters a new position in the opposite direction, holding the position until the market trend becomes clear.

The advantage of this approach is that it does not miss out on market movements; as long as a trend emerges, profits are guaranteed. However, in a volatile market, there can be a series of consecutive stop losses, leading to significant losses.

2. Selective trend trading.

Trends are defined using technical indicators, and trades are only entered when the market movement aligns with the indicators' definition of a trend.

For example, in "Trend Trading Method," the way to confirm a trend is when the market breaks through the trend line, channel line, and inflection point, with all three indicators resonating to confirm the trend. After the trend is confirmed, one waits for a market pullback to enter the trade.

The advantage of this approach is that it allows for selective trading, avoiding consecutive stop losses in a volatile market. However, no filter is 100% effective, and there is a possibility of missing out on market movements due to filtering, which could result in losing some profits.

In summary, both trading methods have their pros and cons. However, the trend-following method, with its consecutive stop losses in a volatile market, poses a significant challenge to a trader's mindset. Changes in mindset can severely affect the execution of trades. Therefore, the second method, selective trend trading, is more feasible.

As for how to distinguish between volatile and trending markets, you can jump to my previous article through the link at the beginning of this article.2. How to Choose the Time Frame?

The concept of trend levels is relatively broad. The simplest way to define trend levels in practice is by using the time scale of the candlestick charts, such as the 1-hour trend, the 4-hour trend, and the daily trend.

After looking at the example of U.S. crude oil above, many people might think that trends require a long time. In fact, trend trading above the 1-hour level can be done, and a well-performing 1-hour trend may hold for more than a week.

In practice, it is recommended to choose 1-hour or 4-hour trends for trading. This is because smaller trends, such as the 15-minute trend, although they can last for 2 to 3 days in a good market, often end within the day, making the holding time too short.

Additionally, trend trading above the weekly level has fewer opportunities, and the holding time is too long, which is too much of a test of patience.

There is a point to note about time frames: you can start small and go large, but not start large and go small. For example, if you are holding a position in a 1-hour trend and notice that the 4-hour level has also formed a break in the same trend, you can then extend the holding period to 4 hours and exit at the 4-hour level. This allows the trend to be held for a longer time, which is beneficial for profit.

However, if you are holding a position in a 4-hour trend, you should not exit at the 1-hour level, as this would shorten the trend holding time, which is not conducive to profit.3. How to Choose the Right Currency Pairs?

I have previously written a dedicated article on the volatility of forex currency pairs, which you can find on my public WeChat account (BaShuZiHuaYuan).

Let me get straight to the point regarding the currency pairs:

1: Stock index futures can be traded.

Although there are often gaps at the open, these do not significantly affect the trend for trading timeframes above 1 hour, such as the Dow Jones Index, Nasdaq Index, Hang Seng Index, Nikkei 225, A50, and so on.

Note: The volatility of stock index futures is very high, so it is crucial to manage your position size well. For a forex account with $10,000, it is advisable not to hold more than 0.5 lots at the same time.

2: Gold and crude oil have significant price movements and strong trends, making them tradable as well.

3: The seven major direct currency pairs in forex can be traded.

4: Among the cross currency pairs, the British pound cross pairs, Japanese yen cross pairs, and Australian dollar cross pairs can all be traded. These pairs tend to have faster movements and larger volatility, making them suitable for trend trading without much hesitation.

How to address the correlation between currency pairs?(1) Varieties with weak correlation can be paired with each other.

Gold and crude oil can be paired with foreign exchange varieties, for example: GBP/USD + Gold + Crude Oil.

(2) Varieties with strong correlation should not be paired.

For instance, within the foreign exchange varieties, the direct and cross pairs of the same series should not be paired. In the schematic diagram below, it shows the 4-hour overlay chart of GBP/USD and GBP/JPY, where the two varieties only differ in the magnitude of their price movements, and the candlestick patterns are very similar.

For example, stock index futures should try not to be paired together, as the global stock markets have a strong interconnectivity and often move in the same direction.

For example, the USD/CAD and crude oil have a negative correlation, the EUR/USD and the US dollar index have a negative correlation, and gold and silver have a positive correlation.

4. Share a trend trading method

The previously shared ZIGZAG + moving average trading system is a trading logic for swings. By changing the exit rules, it can be transformed into a trend-following trading system.

Here is how to do it.

1. Indicators used:The moving average parameters use EMA50 or EMA150, and the ZIGZAG indicator (parameters 12, 5, 3).

2. The method of confirming the trend remains unchanged:

When the body of the K-line stands above the moving average, the trend is understood as bullish; when the body of the K-line crosses below the moving average, the trend is understood as bearish.

3. Entry point and stop loss (taking a long position as an example)

After the bullish trend is established, the price retraces to the moving average, requiring that the K-line does not close below the moving average during the retrace process. At the same time, during the K-line retrace process, the "Z" indicator forms a new inflection point. When the market starts again, enter long after breaking the previous high, and place the stop loss at the lowest point of the retracement.

All three points above remain unchanged, with changes in the exit below and the use of position size.

4. The exit rules have changed

After the market starts to move, move the stop loss until the market reverses and breaks through the latest Z indicator's inflection point to close the position. For example: After entering a long position and the market starts, continuously move the stop loss to the new "Z" indicator inflection point until the order is stopped (this is a protective stop loss with profit) and exit the trade.

After exiting the trade, wait for the market to confirm the direction again, enter according to the rules, set stop loss and take profit, forming a closed loop of trading logic.

5. The position size is changed to use a fixed position size for opening positions.A $10,000 account, 1-hour timeframe, with a single product using a 0.2 or 0.3 position size for opening positions, and do not trade more than three products at the same time.

5. Precautions for Trend Trading

1. Position Scaling

In trend trading, it is possible to scale positions in the direction of the trend. Try to use a pyramid-like scaling method, where the size of the positions added later is smaller. This way, when the market retraces or reverses, the profit given back from the larger positions below is relatively small, which helps traders maintain a good trading psychology.

2. Do Not Focus on Intraday Movements

There is no such thing as an overnight success in trends. Most trends move forward with many retracements. As a trend trader, one must have a macro perspective and not doubt one's positions due to intraday counter-trend movements.

3. Pay Attention to Swap Fees

Trend trading has a lower frequency, and traders are not sensitive to spreads in their trades. However, the holding period is long, and in forex trading, swap fees should be taken into account. When choosing a forex platform, select one with relatively low swap fees and guaranteed security. If you have any questions about platforms and swap fees, you can send me a private message.

4. Use Consistent Position SizesTrend trading primarily profits from price fluctuations in the market. If the position sizes are inconsistent, it can affect the profitability.

Let me give an example: The first order was traded with 1 lot, and it stopped out at 30 pips, resulting in a loss of $300; the second order was traded with 0.3 lots and took profit at 100 pips, resulting in a profit of $300.

The difference in pips between the two trades is 70, but the amount of profit and loss is the same. Even though the big trend was caught, the profit did not increase.

Some might ask, what if the first order lost $90 with 0.3 lots, and the second order earned $1,000 with 1 lot? Wouldn't that be a huge profit?

Please consider the characteristics of trend trading: it has a low success rate but a good reward-to-risk ratio, meaning there are fewer correct trades and more incorrect ones. If position sizes are used randomly, it is more likely that larger positions will be randomly distributed to the incorrect trades, making it easier to lose overall.

Therefore, it is recommended to use a fixed position size for trading.

The above five points basically cover all the factors of trend trading. Understanding these five points establishes the foundation of trend trading.

Finally, a small tip for friends who want to do trend trading:

Trend trading, when done well, can definitely be profitable. However, compared to swing and short-term trading, the profit cycle is longer, and there are more instances of profit giving back in the orders. This requires traders to have a strong heart.