What is trend trading? Put very simply, trend trading is the analysis of price momentum by looking at the lows and the highs of the price. Once again, simplifying, higher highs and higher lows would imply a rising (or bullish) trend whereas lower highs and lower lows would indicate a falling (or bearish) trend. The main problem (and skill) lies with identifying the trend and making sure it is not a trend reversal.
So how do we go about identifying a trend in a trend trading strategy?
It’s not difficult to identify a trend that is already halfway. It’s much harder to pick it when it is at the very beginning. Here are a few things that can help you:
a) Moving averages. When the 200, 100 or even 1 day moving averages start to cross and the price is already higher than the averages it may be a signal of a bullish trend (and vice versa for a bearish trend)
b) Price channel lines. When the support/resistances of the old trend are broken, it may be a signal that the range is broken and that a new trend may be on the way
c) RSI indices and stochastic oscillators. If you are crossing supports / resistances / moving averages and don’t get any overbought / oversold signals then it may mean that the cross is a genuine one and not a fluke
Next question you may have is – over what time frame should you look at these indicators? A trend can last as short as 5 minutes or as long as 2 years. Honestly, it’s a matter of personal preference and how often you are looking to do your trend trading. If you are looking to day trade you may want to look at 5 minute intervals. If you are looking at a more fundamental trading strategy you may want to look at weekly charts. I personally use anything between 1 hour and 1 day. One little tip that has worked very well for me: using larger time frames to indentify the trend and small time frames to decide the entry and exit points for the position.
Invariably, there is a large element of subjectivity in indentifying patterns when trend trading. And as humans, emotions will play a large role in our ability to spot them correctly. If you are on my newsletter you will have received the 7 key elements any successful trader must master and control – and emotions is certainly not the least important!