1. Introduction to Stock Trader Types
  2. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  3. Decision-Making Methods: Informed, Uninformed, Intuitive
  4. Informed Traders: Fundamental Traders, Technical Traders
  5. Swing Traders
  6. Buy and Hold Traders
  7. Value Traders
  8. Trend Traders
  9. KISS Traders
  10. Momentum Traders
  11. Range-bound Traders - Break-out Traders - Channel Traders
  12. Options Traders
  13. Options Seller Traders
  14. Day Traders
  15. Pattern Day Traders
  16. Intra-Day Traders
  17. Intra-Day Scalp Traders
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

Trend traders aim to capitalize on long-term trends in the market. They believe that, if they are able to correctly identify these trends early on and then properly manage their positions, they can profit considerably.

Traders basing their decisions on trends tend to have a long-term approach. They may try to find a great stock with an upward trend, then buy it and hold on until the trend changes. As upward trending stocks tend to have higher highs and lower lows, trend traders tend not to be as worried about outside factors like overextension of a stock, provided that the trend is continuing.

Traders who follow trends have to be reactive. They don’t forecast or predict markets and price levels. Rather, they set strict rules for themselves and then aim to follow them. Trend traders usually base their risk management on a calculation involving the current market price of a stock, the equity level in the portfolio overall, and current levels of market volatility. Based on their calculations and rules, trend traders set a specific amount of a holding to buy or sell which is based on these various factors. As prices change, the initial trade may be reduced or increased. Because of these strict guidelines, a trend trader’s average profit per trade tends to be far higher than his or her average loss per trade.

Within trend trading, there are various levels of systematization that characterize different strategies. Some trend traders are known for relying on their gut instincts, while others follow non-emotional sets of rules which are designed based off of mathematical models.

Process of the trend trader

A trend trader first aims to identify a trend. In order to do so, they analyze market trends on different time frames, usually prioritizing the longest of these as the overriding trend and the general driver of direction. Thus, if a stock has increased in price overall over a span of a year, but has experienced smaller-scale dips in price throughout that period, the trend trader is likely to prioritize the general upward motion. One key factor in identifying these trends is the concept of the “breakout,” in which a stock achieves a new high or low on a smaller timeframe.

Benefits of trend trading

Trend traders follow the current market data. They are not as concerned with past price activity or with future activity either. As a result, trend traders can experience these benefits:

  • Ability to profit regardless of market conditions: Trend traders can generate a profit in either a bull or a bear market.

  • Removal of emotional element: Most trend traders rely on their mathematical models to predict when to buy and sell. This removes much of the emotional element of trading, which can be difficult for other trading strategies.

  • No predictions necessary: Market trends are occurring all the time. The trend trader doesn’t focus on where those trends will lead, only on where they are now.

  • Risk management is the highest priority: Trend traders maintain defined exit protocols, allowing for strict control of the risk they take on at all times.

  • Capitalize on mass movements and investor psychology: Trend traders like to think of themselves as the level-headed investors who capitalize off of the panicky movements of other investors. By maintaining strict discipline in the face of market movements, these traders feel they have an advantage over others.

  • No traditional diversification: Trend traders work across all markets and instruments. The process of identifying and following trends applies in all areas of investment.

Rules for trend trading

  • Believe what you see: Trend traders are not bothered by the news or other sensationalized reports. They look to the charts to identify trends.

  • Determine the trend: is an essential element of the market. In order to be an informed trend trader, one must identify trends before making any investment decisions.

  • Find breakout candidates: If major indices are bullish, trend traders tend to look for breakout candidates.

  • Market correlations are fickle: A market correlation from yesterday has little if any bearing on today’s activity.

  • “Set and forget” trades: Trend traders follow strict money management rules and tend to move on to other areas after completing their trades.

  • Buy dips in uptrends and sell rallies in downtrends: Whatever the trend is, there will always be an intra-day or intra-week countertrend reaction. Astute trend traders capitalize on these shifts to maximize profit.

  • Don’t look for the top or bottom

Trend traders aren’t concerned with picking the top or bottom of the trend. Rather, they usually aim to participate in the top third of a move, as that is the time at which rewards are greatest. They look to triggers like zone trades (wherein they buy or sell at support or resistance) and momentum trades (wherein they buy based on overall pattern as well as short-term momentum).

Risks associated with trend trading

Trend traders experience risks and challenges, just like all other types of traders. They may experience false starts (or “whipsaws”). If a stock gives a positive signal and then immediately reverses its trend, this can be problematic. A dramatic change in market conditions, called a “shakeout,” can also throw a wrench into a trend traders plans. Take the example of a stock that may have more than doubled in price over the span of several months. There may be potential false breaks or shakeouts associated with the stock as it continues its trend.

Trend traders occasionally sell out of their positions too early, meaning that they do not maximize their profits. This often occurs when trend traders follow their emotions rather than their systems.

Conclusion

Overall, trend trading can be highly profitable, provided it is done with a level head and an appropriate system set in place. Trend traders must consider time frames, transaction costs, their ability to endure stops, and their tolerance for corrections. Trend traders often specialize in stocks of a certain kind (for instance, blue chip stocks or highly volatile stocks).

 


KISS Traders
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