Trend trading strategies, their pros and cons

Quite a considerable number of traders rely on trend trading strategies to inform their trading decisions. Other traders prefer the trend trading owing to its simplicity nature. We have narrowed down both the pros and cons of trend trading, to give you some insights, before embarking on the strategy.

Pros of Trend Trading

Provides a sneak peak of what is likely to happen in the future

As a trend trader, you will be involved in studying previous trends in the market, and price actions that took place owing to the events that took place then. With proper analysis of past trends, as a trend trader you are able to use past data to gauge future price movements and play your cards right.

Protection from losses

With the study of past data, it becomes easier to anticipate how the market may play, hence providing a warning sign of when to enter or not enter a buy and sell position. You can always use the trend data to analyze the different probabilities and what ‘ifs’ in the market.

Ascertain risk involved

As mentioned in our previous article, one main job you have as a trader is being a risk manager. You will be dealing with the risk of losing your investment and worst case scenario, being shown the exit door. As a matter of reality, massive losses, risks will always come your way. It is not the ‘if’ but the ‘when’ it happens; you just got to be ready. Trend trading gives you the chance to study past risks and determine what may come in the future. Adding on to your being prepared in the eventuality of the risk.

Cons of Trend Trading

Just because trend trading gives you an upper hand in projecting future market trends, doesn’t mean it’s the real deal in trading. Nope; just like any other strategy, it has its downside too as we will see below.

Knowledgeable on theory and macroeconomics

To be a successful trend trader you will be required to fully understand the market theory and not only that. You need to be an expert in the field of macroeconomics in order to gain better insights. Its therefore not a walk in the park but you have to work your way up.

Time consuming

Being a trend trader means that you must be ready to spend most of your time glued to the news to catch emerging trends on economics, politics, and major global events which influence price movements in the financial market. Actually, trend trading is time consuming and is therefore only favorable to full-time trader who are ready to spend their entire day following trends. So if you are a trader doing trading as a hobby, then trend trading clearly is just no for you.

History may not always repeat itself

As we outlined, trend trading is based on news events that trigger the money markets causing it to move. The truth of the matter is that not always that history will repeat itself. What happened in the past is not guaranteed that things may turn in a similar direction in the future. In this case, if you make your move too fast upon the release of a news item, then you stand the risk of losing out if the tides don’t go your way.

Conclusion

Forex trading is all about trial and error; exercise with as many strategies as you can, until you settle for your best fit.