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Trends in indices trading can capitalize on the natural momentum of the market; the approach here is to identify and ride the trend in play, whether it’s an uptrend or a downtrend. A trend-following strategy requires the premise that markets trend for extended periods of time, so the earlier a trader can spot the trend, the longer they are able to ride the wave.
The first part of a trend-following strategy is knowing what a trend actually is. A trend represents pointing to clear upward or downward movements in an index’s price. The most common method of determining a trend is through the use of moving averages. With a very simple look at the 50-day or 200-day moving average, it helps to smooth out the price action and even reveal direction in a market. If it’s regularly bouncing above the moving average, then that would mean an uptrend, and when the price is below the moving average, it becomes a downtrend. Moving averages will filter out the noise from short-term price fluctuations to a great extent and will help you stay on the bigger picture.
One of the popular tools for identifying trends in the indices trading is by use of the trend lines. Connecting the lows in an uptrend or the highs in a downtrend helps in the indication that can be visually used for the confirmation of the direction in the market. If it is possible to achieve a consistently higher high and higher low, it indicates an uptrend. A series of lower highs and lower lows leads to a downtrend. Trend lines will keep you focused on the correct side of the market and help you avoid false signals.
From the above, a confirmed trend calls for the entry into trade. Good sense would be to trade at confirmation of the trend rather than wait for signs that it is moving.
This also decreases the risk of entering the trade too soon, with perhaps the trend not yet established. A trader would wait for a pullback or small retracement in price so he can enter the market at a better level rather than chasing rapid prices. This way he can join the trend while minimizing its reversal.
The other important component of the trend-following strategy is the risk management aspect. Generally, in indices trading, the most widely used technique is to issue a stop-loss order in case the index makes an unexpected turn in a trend. Placing stop-loss orders at levels lower than the recent low in the case of an uptrend or higher than the recent high in the case of a downtrend may help limit losses in the event the market turns against one’s position. As long as the trend continues, the stop-loss is then adjusted to lock in some profits and allow the trade to run as long as the trend remains intact.
The key to a trend-following strategy is patience. Markets can’t keep moving in a straight line, and at some point, the price will oscillate within the trend. One should not fall for short-term movements and respond to those; the trend follower follows the bigger picture, and he keeps the trade so long as the trend is maintained.
With proper applications of moving averages, trendlines, and prudent risk management, a successful trend-following strategy can be actualized in indices trading by a trader for continued riding in the momentum of the market until achieving consistent returns over time.
