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.
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