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3 months ago

A concise expose on Trend Trading in the Crypto Space

Cryptocurrency trading also called Crypto trading is simply the exchange of cryptocurrencies. It is exactly as the name depicts; buying and selling one cryptocurrency for another, like in Forex trading. An explicit piece on Crypto can be found here. Trend trading happens to be a style of trading adopted in crypto trading. A trend is established when there is a pattern in price movements such as up or down. The majority of investors in the crypto space are in it for the gains that can be derived. No investment is really embarked on without intention to make a profit. Trend trading is a method that could almost guarantee that an investor is making the optimum level trading decision.

Trend trading is a style of trading that attempts to record gains in a particular direction by analyzing the momentum of an asset. Trend trading is depicted when you analyze the price of a security and specify a trading timeframe, the price at any given moment will be moving up, down, or sideways within that timeframe. So the term trend trading is always relative to a timeframe. For instance, a stock price can be moving down over the last 3 weeks (weekly downtrend), but up over the last 3 years (yearly uptrend). Trend trading means you trade a security in the direction of the current trend, and furthermore, it is distinguished from other forms of trading because you are generally looking to hold the position for as possible within the trend until such time the trend changes direction.

Like all investment techniques, the concept behind trend trading is simple in theory yet complex in practice. When the value of a stock, currency, or other investment is rising or falling, it’s following either a positive or negative trend. Trend trading involves analyzing these upward or downward trends and predicting whether or not they’ll continue to rise or fall. For example, if a stock has been decreasing in value for months and you believe it won’t decrease any further, you would buy it then and wait for its value to inevitably increase again. 
In this case, you’ve successfully trend traded because you bought the stock at its lowest possible price. 

How it works - Notable terms for tools used in Trend trading include the following: 

There are situations when traders enter into a long position when a security is trending upward. Higher swing lows and higher swing highs characterize an uptrend and lower swing lows and lower swing highs depict a downtrend. When an asset is trending lower trend traders may opt to enter a short position.

Strategies are assumed in trend trading, in some, speculations are made that security will move in the same direction continually it is currently trending. a take-profit or stop-loss provision is often contained in these strategies in order to lock in a profit or avoid big losses if a trend reversal occurs. short-, intermediate-, and long-term traders all use such strategies in Trend trading. To aid this trading style some technical tools added to price action is used to determine the trend direction and when it makes a different movement. Asides that, Price action traders look at the price movements on a chart. 

Just like any form of trading, trend trading requires an understanding of context and a good entry price within the trend. Given that you are looking at a long holding period, you can generally enter at a price within the current trend and come out ahead, but it is still important to know if the trend is just beginning, or been in place for some time. For instance, the stock Netflix has been in a yearly uptrend for quite some time, reach $400 per share. However, if you simply bought at $400 because of an uptrend price recently pulled back lower to $250 that is not good. 

Trend trading has evolved to something more than watching for movement signals on charts during the last few years. Momentum Indicators are now used in trend trading, they are just as many as strategies used and are characterized using different scenarios. An example of a momentum indicator might include using the relative strength index (RSI) to signal entries and exits to look out for an uptrend. Hypothetically, a trader could wait to see if the RSI of a token or coin will rise after it drops. if there had been a pattern of such movements this could signal a long position. Here the indicator would be that which is showing the pulled back price still rises above the threshold. If the trader in question sees an RSI drop below 30 and then rise above it in the long term the trader to exit or sell out when  RSI rises above 70 or 80 and then falls back below the selected level. 

In trend trading analysis another tool is Moving Averages which are sort of the boundary that determines if a price is significantly lower or higher when it changes. For the sake of filtering out signals moving average strategies are combined with some other form of technical analysis. An uptrend may be present when the price is above a moving average and when the price is below the moving average it helps to indicate that a downtrend may present.

There is are also Trendlines & Chart Patterns which trader regularly use in combination to find trend trading opportunities. A line that is drawn to trace swing lows in an uptrend or swing highs in a downtrend is a trendline. During an uptrend when the price pulls back to, and then bounces higher off of, a rising trendline, traders are more likely going to buy. In the same vein when the price rises, and then falls away from, a declining trendline (depicting a downtrend) some traders opt to short.

Chart patterns, on the other hand, are also studied; some patterns like flags or triangles usually indicate the potential continuation of a trend. An instance, aggressive and continuous price increase forms a flag or triangle. When the price breaks out of the pattern, that signals a continuation of the increase. In some cases when a trader indicates an upward movement may commence he looks out for a breakout from a triangle but, only if the price is trading above a specific moving average, would he enter into a trade.

Benefits of Trend trading

All in all, trading is risk inherent and should, therefore, be done with enough knowledge in order to get the best out of it. One should not make uninformed or irrational trading decisions to guide against loss. The benefits of trend trading are that when you pick the right security, at the right price, you will do very well as the trend moves in your direction over time without incurring high transaction costs, or trying to time getting in and out of the trend. You aren't as concerned with daily price fluctuations as you know price never moves in a straight line, but will still end up higher (for an uptrend) through time. There is probably no better way to invest than proper trend trading where you pick the right stock, at the right time, early in a trend, and sit back and watch it grow in passive fashion over a long term period of time. 

  • The basic advantages to trend trading are the same for an expert or novice. There's an opportunity to increase win rate with this tool that you can use to try and make more profits.
  • Investors' risk to reward ratio can be higher being that movement analysis and histories of a particular security are easily know; chance of choosing the correct times to buy or sell higher. 
  • Strong trends are easily identified hence the set of buy and sell rules are near perfect even though no trader can be 100% correct all the time. 
  • Trend trading was used in so many different markets over time from futures to commodities, securities and now trend trading for cryptocurrency, which is the focus of this bit.

 

The difference between a successful trading investment and a failed one boils down to the strategies and expertise applied in making moves that form the end result. This piece is not to say that other forms of trading do not bring gains to people, even a layman can earn from trading without intermediaries these days, but calculated steps enabled by trend trading is vital.  With little to no regulations in the crypto industry, manipulation is given a free pass hence exchanges would leverage on that. One needs to take this into consideration when trading according to trends.

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Credits - Steven Nussbaum, Cory Mitchell, Hedgetrade, Ian Cogswell

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anita O.

Lover of tech and blockchain.

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