A common means of making a profit from the price movement of equities is trend following in day trading. The rationale behind trend following in day trading is that during a relatively short time frame a trader can buy into a rising equity or sell short a falling equity and exit either trade after a profit and before a price reversal. In each case traders use technical analysis in order to assure themselves that the trend will continue for the duration of their trade. This strategy works for both short and long term trends. Traders commonly use technical tools such as moving averages, channel breakouts, current price, and tools such as Japanese candlesticks in order to assure themselves that the trend will continue or that one is setting itself up.
Jumping on a Moving Train
The purest form of trend following in day trading is to virtually ignore everything except the trend. In doing so it is important for traders to set and repeatedly reset their stops in order not to get caught in an unexpected market turn. Conservative trend traders do not enter a trade until they are certain that a trend has become well established. The same traders leave quickly once they come to believe that the continuation of a trend has become uncertain. More aggressive traders attempt to use signals such as the Doji to anticipate when a trend will reverse itself. This allows them to get out of a trade before incurring losses and into the next trade as a new trend establishes itself. How to become a successful stock trader includes knowing when to get in, when to get out, and when to avoid a trade completely.
Risk Management for Trend Following in Day Trading
When following trends traders consider how much of their trading capital they are investing in a trade, the degree of volatility of the market, and the current price as compared to where the trend started and where analysis suggests that it will end. By avoiding volatile markets traders reduce their risk but also reduce their chance of profit. When investing late in a trend traders risk being caught in a turnaround but may be able to eke out a little more profit. When a trader puts all of his capital into one trade he may well increase his profits but he runs the risk of greater losses. The worst situation for someone who is trend following in day trading is to over extend, experience substantial losses, and have a margin call. The point of trend following in day trading is that one gives up the opportunity for large profits in return for steady, conservative income. Traders need to decide which strategy they are going to pursue and not switch in mid-stream. Trend following in day trading can be part of successful stock trading , commodity trading, or Forex trading. The principles are the same whichever market one trades. The most important part is to set up a strategy, follow the strategy, test the results, and modify the strategy as needed.
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