Market moves in trends

There are a lot of factors driving the market to move upward or downward. As a result, different trends exist in various markets over time. In general, market trends can be classified into Primary Trend, Secondary Trend and Short-Term Trends.

Trend following vs Mean reversion

When talking about trend, the most used trading strategy – Trend Following always comes to our mind. Trend traders enter a long position when the asset is trending upward; and enter short position when the asset is trending downward. They will profit from the trade if the asset continues to move with the trend.

On the other hand, some traders prefer to do it the other way round, which is known as the Mean Reversion strategy. The theory is that asset prices eventually will revert to the long-term mean or average level of the entire dataset. So this type of traders sell when the price rises to the extreme and buy when the price falls to the other extreme, expecting the price to revert to mean in both cases.