Traders love a good trend. Everybody wants one, for their very own, and understandably so, since a great deal of money can be harvested in a good trend.
But how do we trade a trend? Well, there are a number of tactics that one can use. (Some old traders say that trends are easy since any old trading plan will work. Because prices are always moving in one direction, even if you enter with a poor trade position, it makes no matter, since the trend will bail you out in the end. There is some truth in this old maxim, but nevertheless there are a lot of refinements that we can bring to trend trading.)
One of the first things all market analysts learn is that technical analysis explained how to recognize a trend as early in its existence as possible, and that one definition of the trend, based on the relationship between the close and the PLdot, lets us do that. You will recall perhaps that the definition is three closes on one side of the PLdot defines a trend. After the third close you are in a trend.
This is important because the best, the strongest, and the richest part of a trend is often the earliest part, when it first gets going. Then, once you recognize a trend the thing is to hang with it as long as it exists. If your trading situation permits, you want to add to your position by pyramiding, so that as the trend develops your profits also grow more rapidly.
Surely getting aboard a trend and hanging on tight is one of the best ways to make money in trading. If you have learned nothing else in your education, you should at least know that how your style of technical analysis explained trend formation is one of the basic building blocks of any trading system.
All well and good, you say, but how exactly does one time the entry to a trend? And how do you manage a trade in a trending market?
Of course trends are not all the same, some are slow and some are fast and others are old and some are young.
First we will consider the fresh new trend. The market has been in congestion for some time, perhaps for many days if you are a swing trader, or for many hours if you are a day trader. The parameters of the congestion are clear to you. Then suddenly there is a change in conditions, frequently (but not always) news driven. The market starts to move rapidly on one direction.
This is a situation for rapid action. Enter in the direction of the trend as soon as you can and hang on. The exact point of entry is less critical than the fact of getting aboard. This is a move that will last for many hours or days and the sooner you are aboard the better! You can buy into this trend as it breaks the congestion parameters or as the next bar retraces to the top of the trading bands. If it is a real trend based on fresh new energy, you won’t see any retracements deeper than that for quite a while!
Contrast this to a mature trend that has been going on for a while. Can you still get aboard? Yes of course, but if the energy is “mature” and starting to lose a bit of its oomph, then you will need to be more cautious in your entry techniques. In this case you should be looking for a pause in the trend, a price retracement to the midline of the trading envelope at least. Check on your higher time period to make sure there is sufficient potential left in the trade, enough to make it worth entering this no-longer-fresh trend. I usually use technical analysis tools and methods when trading and in this case the retracement would be to the neighborhood of the PLdot.
If you are uncertain about these guidelines some time spent examining a chart will surely bring your understanding to a higher level. And most traders can benefit from a detailed look at technical analysis explained in a training course of their choice, as they hone their entry and exit skills.
Next time we’ll talk about entering and exiting congestions.
Ted Hearne is a Forex and bond trader who has written extensively about trading and has co-authored a “technical analysis explained” course called “Drummond Geometry”. His biography and further information about his work can be found at the technical analysis explained website.
Tags: technical analysis