In working with financial instruments, as well as in fashion, there is also such a thing as a “trend.” It defines the market movement in one direction. To define this movement on the chart is easy. To do this, find the maxima and minima, and hold the line on them. If the highs and lows are constantly growing, so the trend is rising.
If they decline, then, on the contrary, it is a downtrend. These concepts form the basis of such an element of trade, as a Trend Trading Strategy.
On one hand it really looks clear – after determining trends one can buy options. For example, if the general movement is upward, then the option Call is sold. If the price is falling for a long time – you have to buy the option Put. However, looking at the chart, you can see that the trend never lasts. Moreover, on volatile instruments it often develops waves. For example, when an upward movement takes place, there may be frequent price rollbacks from the highs to the lows. However, to ensure that the trend continues, and the trader has a confirmation of the upward movement, the price on the chart should not touch the previous minimum, and be higher.
In “Trend trading” strategy the key tools are the support and resistance lines. The support line is carried on the low price. It determines the level through which sellers or bears cannot omit the price under. When an upward trend, the level of support will go upwards either. At the same time, the price chart can relate to the level of support, and in some cases, go for it. But if the price continues to move, then it seems to be repelled from the support level and goes up to the new maximum.
The same applies to the level of resistance. Meeting with this line in the chart, the price starts from it and goes down. At the same time, it is possible to speak on the upwards movement when the resistance level goes upwards. If in the market there is a lateral movement, the level of support and the resistance level will go horizontally (this situation is also called “flat”). If both lines are directed downwards, so the market is bearish.
This opens up a trader the following prospects:
- the possibility of trading within the channel formed by buying contracts on the rebound prices.
- waiting for the drawn lines breakdown one can buy a contract towards the resulting breakdown.
That’s all for now. Got any questions? Just ask the expert!