Trends are, for some traders, the most important thing to understand when trading. That’s because there are tons of traders that follow the strategy known as trend trading with the news. The strategy is relatively simple, or so it seems. All you need to do is find trends in the market, and capitalize on them. If you’re not breadth to how to do so, check out this trend trading tutorial, it covers all bases. While we hear a lot about the upsides to this strategy, the downside isn’t often discussed. Today, we’ll cover the pros and cons of the trend trading strategy to ensure that you’re making the right decision if you decide to employ it.
Trend Trading Strategy Pros
For many, the trend trading strategy is the heartbeat behind the profits they make trading, and for good reason. Here are some of the biggest advantages provided by taking advantage of this strategy…
- History Repeats Itself – While this is never 100% the case, for the most part, history repeats itself. Therefore, by studying and understanding trends, it becomes somewhat possible to see into the future. Essentially, making trades becomes a this for that proposition. If this happens, that happens so to speak. At the end of the day, this can help make trading a more efficient process.
- Gauging Risk – The trend trading strategy also includes some risk management. In particular, if a financial asset isn’t showing a trend, it’s because of one of two reasons. Either the asset is trading sideways or the market is indecisive when it comes to price action. When trend traders see this, they know that the asset could go either way and that the risk involved in the trade likely outweighs the reward.
- Further Protection From Losses – Understanding trends and employing the use of trend data in your strategy can help you to avoid losses in some trades. Watching long term trends will let you know if a technical sell off is coming. If so, you can avoid the sell off by selling your shares first. In derivative investments, this can even turn into a profit by using trends to predict large drop offs!
Trend Trading Strategy Cons
While trend trading is the key strategy of choice for many traders, it’s important that trends do have their downside. Here are the cons that come along with trend trading…
- There’s A Big Learning Curve – Successfully practicing trend trading takes quite a bit of knowledge. Before trusting the trends, it’s important to do your research and understand exactly how trends work!
- Trend Trading Takes Time – Trend trading is far from passive investing. When you’re trend trading, it’s important that you pay attention to the market environment at all times. This takes far more discipline than more passive strategies that don’t require this type of time, mental, and emotional commitment.
- History Doesn’t ALWAYS Repeat Itself – While history has a tendency, or a trend to repeat itself, this notion is not perfect. Changes in the present can change how the future happens. With that said, while trends will lead you to the right decision most of the time, there will be risk and there will be losses. It’s important to be prepared for this.
The truth is that the trend trading strategy is a great way to go. I personally employ the strategy when managing my own portfolio. However, it’s important that you understand both the benefits and the downfalls of any strategy before you employ it.