Basics of Trend Following

It is a widely established fact that one of the smartest ways to trade in binary options is to go with the trend. Therefore, if an asset appears to be moving in a certain direction, at least for a particular period of time, then you trade in that direction.

There are many reasons why this strategy is touted by experts. The most important one is that it is often easy enough to recognize a trend. Therefore, you can set all of your trades according to the patterns that you have distinguished. To understand more about this technique, here are the basics of trend following:

Identifying the Trend

First things first, you need to be able to see when a certain pattern is emerging. While this is not always easy, over time you will get better at recognizing the signs. You will require charts to be able to determine whether or not a trend is forming. A common assumption is that you simply have to look at the direction in which the price is moving for an asset to see whether or not there is a trend. Unfortunately, it is not quite so simple.

If you have ever looked at a chart, you will be able to see that there a minor fluctuations. For instance, if an asset has been increasing in value for a while, it may suddenly experience a dip, and then go back up again. So, what are you to do then? You will then need to look at a series of highs and lows to determine if there is a pattern.

If there is one, you will be able to tell that there is a trend occurring.

Entering and Exiting a Trade

The key to making a profit from trend following is to know when to enter and exit a trade. As you can imagine, you should only enter a trade once you are confident that you have identified a trend. Doing so when there is no trend established will result in the trade ending up out of the money.

The best way to figure out your entry point is to use technical indicators. What you use is entirely up to you – whatever you feel most comfortable with should work just fine. Oscillator indicators such as RSI and CCI often prove to be most helpful in such instances.

Just as important as knowing when to get in on the action is being able to tell when the trend is about to reverse. This signifies the expiry time of your trade. In order to determine this, you will need to calculate how long this trend is likely to last. This will give you some insight into when your trade should end.

When Trend Following Does Not Work

It stands to reason that you cannot attempt to follow a trend when none exists within the market conditions. This means that it is not always possible to rely upon such a strategy. Just as you must know when to place a trade, you are also required to understand when to leave well enough alone.

This is why the most dangerous conditions for trend following is a volatile market. This is because the prices of many assets will fluctuate, often without warning. As a result, the charts will provide readings that will be false and render any assumptions that you make according to it quite useless.

Volatile markets are often forecast by fundamental analysis. If there are significant events occurring, it is best to step back from trend following.

These are the basics of trend following. This will help you to get a better understanding of what these types of strategies entail and whether or not they are suited to you.

Page Updated: May 9, 2017

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