The Best Futures Trading Strategies: Trend Trading
What Is Futures Trend Trading?
The maxim “buy low, sell high” is so widely used that even non-financial professionals understand its meaning. This is only another way of saying “benefit from the upward trend.” A market’s overall trajectory over time is known as its trend. Ideally, a trader can benefit from the pattern they have noticed in order to increase the success rate of their transactions. When the trend is downward, futures traders might reverse the expression and say, “Sell high, buy low.” Making more educated trading selections can be aided by knowing the direction of the current trend and if it is changing.
Interpreting Trends in Futures Trading
The following indicators are used in trend identification and analysis:
Trendlines
Looking at the chart is the simplest technique to see a trend. A trendline may be used to link data points in order to provide an idea of the current state of a trend as well as its potential future direction.
When prices break above the trend line, it may be a sign that the downtrend is about to reverse. In a downtrend, linking pivot highs to create the trend line aids in identifying the downtrend resistance.
In an uptrend, join two pivot lows to form a trend line (a pivot low is the lowest low of many bars before and following that low). When prices cross or break the trend support line, it may signal a potential trend reversal. The trendline aids in identifying the trend support.
Moving Average
The moving average, one of the most often used indicators in technical analysis, depicts a data point for a certain number of bars to normalize the data points and make it simpler to spot trends overall. It is regarded as “moving” because the most recent average is added to each new bar that is created in real time, eliminating the oldest data point from the equation.
On daily charts, the moving average computation commonly uses lookback values of 50, 100, and 200. The average periods used in intraday charts are typically 5, 10, and 20.
Moving averages may be used by a trader in a number of ways to aid in trading decision-making:
Identification of Trends
Two effective visual tools for determining the direction of the current trend and the mood of the market are provided by a moving average.
Merely observing the slope of a moving average is among the most effective methods for identifying the direction of the current trend. A downward slope is bearish, whereas an upward slope is bullish. Full-time traders can enhance their ability to recognize patterns throughout various time periods by varying the moving average’s lookback period. Observing the price bars is another easy method to gauge the mood of the market:
- If bars are above a moving average, there is a bullish bias.
- If bars are below a moving average, there is a bearish bias.
Support and Resistance
As prices approach the moving average lines, they frequently serve as levels of support and resistance.
One tool for determining potential support or resistance is a moving average. The moving average serves as support when the price approaches it from above, signaling that it may find it difficult to pass through the moving average. Similarly, a moving average may serve as resistance when the price approaches it from below.
Moving Averages Crossing
When the price crosses through a moving average, it may be a sign that the trend is shifting. A bar closing price crossing above or below a moving average is interpreted as bullish or bearish, respectively.
A shorter-term moving average crossing above the longer-term moving average may portend a bullish trend, while a shorter-term crossing below the longer-term moving average suggests a negative trend.
Strength and Direction of The Trend
Two indicators that are used to assist assess trend direction and strength are the directional movement indicator (DMI) and the average directional index (ADX).
In order to assess whether a bar’s motion has been more positive or negative, the DMI examines the shift in highs and lows from bar to bar. The DI Plus and DI Minus lines, which are often shown as green and red lines, are the consequence of this:
- A bullish trend is shown if the DI+ line is higher than the DI- line.
- The trend is bearish if the DI-line is higher than the D+ line.
- The fact that the DI-line is above the DI+ line suggests a negative trend.
- A shift in trend may be occurring when the two lines intersect.
Trend strength is gauged by the ADX, a derivative of the DMI computation. It is widely acknowledged that numbers above 25 indicate the presence of a trend, whereas values of 25 or less indicate the absence of a trend.
The greater the trend, the higher the number above 25. When the ADX level passes above or below 25, traders keep an eye on it.
