What is Trend Trading?
Trend Trading is a technique of stock trading, where a trade is entered after confirmation of a market trend and is carried on to the end of the trend.
Stock market moves only in three directions. Either it moves up, moves down or moves side ways. These trends, respectively called as an Up trend, a Down trend or a Side trend.
The rule is to always buy in an uptrend, sell in down trend and cross your hands (go fishing) in side trend.
Always always remember that market trend is your friend, trend is your friend till the end and always be with the friend (trend).
The trend can be determined by analyzing the price action. The basic criterion for an up trend is that, the prices keep making higher highs and higher lows. Where as a down trend is characterized by lower lows and lower highs. A side trend does not exhibit such a pattern. It keeps moving up and down, with in a range, some times haphazardly. It seems to go no where.
Trend differs in different time period charts. It can be up in weekly chart but down in daily charts. At the same time it can be up in hourly chart and down in five minute chart. So the analysis of trend should be done in the trading time period and one about four to five times the trading time period.
This means that if you are day trading in five minutes time frame, then both five minute chart and twenty or twenty five minute chart should be analyzed. Both need to be in uptrend to take long trades and both need to be in down trend to take short trades.
Among these Moving Averages is the oldest, best and commonly used indicator. It forms the basis of many more indicators like, MACD, Price Oscillator and Volume Oscillator, Ichimoku Kinko Hyo, etc;
There are many many techniques in following a trend. What I am showing below is a very simple strategy as an example for trend trading.
When the price close above the moving average buy above the high of that bar with stop below the low of the bar.
When the price close below the moving average sell below the low of that bar with stop above the high of the bar.
After confirmation, in an up trend or a bull market, stocks are bought to create a buy position. The trade is continued by protecting the profit with a trailing stop loss sell order. Buy position is squared by selling the stock, after confirming trend reversal.
Similarly, in a down trend or a bear market, stocks are first sold to create a sell position. The trade is continued by protecting the profit with a trailing stop loss buy order. Sell position is covered by buying the stock, after confirmation of trend reversal.
When the 20 period moving average crosses above 40 period moving average, buy above the high of the corresponding bar with stop below the low of the previous swing low.
When the 20 period moving average crosses below 40 period moving average, sell below the low of the corresponding bar with stop above the high of the previous swing high.
Adding one more moving average with double the period size, reduces the number of trades, reduces the number of whipsaws and allows the trader to catch bigger moves.
This system gives good result only in trending market. Most system fails in side trend.
Always and always place stop loss order immediately after creating a trade position. Many are ruined because they failed to take this action. Cutting short your loss is at most important. It is more important than making money. Because you have to be alive in the market to make money. So you have to preserve your capitol.
Do not anticipate and take action. You may be correct. But allow the market to prove you right. A trend trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is doing.
You success depends on your money management. Decide how much money to invest and how many shares to trade. Determine your loss if the trade goes against you. Take the trade only if you can afford to loose that money.
Trend following allows to gain the maximum profit, what the trend has in its store. Also it keeps us from going against the market trend. After all trend is our friend.