Trend trading is really a trading approach that offers the potential to reap greater profits by capitalizing on large market moves. You will find two main concerns working with trend trading; either the market is trending upwards (bull trend) or trending downwards (bear trend). For the trend trader to profit, it is important to correctly identify the trend before a trade is placed.
As it pertains to trend trading, after the trade has been placed, the trend trader will usually stay in the trade until such time that it appears the overall trend has changed.
Trends occur at different time frames and is seen on various time-frame charts. A pattern trader, being more a long-term trader where trades usually last 2-3 weeks or even more, will probably define a pattern from analyzing a daily or greater time-frame chart. Minute charts works extremely well for fine-tuning entry, they certainly would not be employed for determining the trend.
The time-frame of the charts used is very important to the trend trader. If the trend is being defined on a regular chart, it is the weekly chart that should be used to find out when the trend has ended as well. Using this method, the trader is not exiting a regular or greater trend because the trend has changed on the lower time-frame daily chart.
There are numerous counter-trend moves that occur in just a complete trend move. They’re usually seen on the lower time-frame charts in respects the time-frame used to define the trend. swing trading For example, if a regular chart is employed to define a bull trend in the SP500 market, you will see moves from this bull trend that’ll be easy to understand on a daily time-frame chart. The trend trader would normally stay in a trade even though the market is moving against the career, as it is expected to recuperate soon if the trend continues to be intact.
Trend traders often use indicators such as the moving averages to find out when to enter and when to exit. For example, a pattern trader may buy when the 50-day moving average is greater compared to 200-day moving average, and sell when the 50-day moves below.
For most traders, residing in a trade when the market is making a move against the trend direction is difficult to do. You really have to stick to your guns and avoid reacting to the market as it moves to erode your accumulated profits if you wish to be successful as a strict trend trader.
One other kind of trader to take into account may be the Swing Trader. Swing traders usually trade off the daily time-frame or lower (minute charts). Swing trading is focused on following a market’s almost certainly current direction. For new traders, swing trading can be quite a more effective approach due to the shorter amount of holding a trade and usually less exposed in risk capital. Swing trading is considered by many to be a less strenuous and less stressful way to enter the markets.
The swing trader will usually go long when the short-term market is confirming a swing bottom and looking to move up, and going short when the market is confirming a swing top and looking to move down. Thus as the trend trader may be holding an extended based on a bullish weekly trend, the swing trader might be either long or short in this same period because of the direction the market is currently moving in the lower time-frame.
With trend trading, the cons are clear. You have to permit possible large moves against your position when the trend is in a counter-trend phase. With swing trading, the cons may also be clear. While the overall market is trending in a single direction, the swing trader will sometimes be trading from this trend that is often wrought with greater risk than trading with the overall trend.
Therefore, when contemplating the negative areas of both trend trading and swing trading, why not simply utilize the best of both?
In order to do that, it is important to find out first the overall trend direction much just like the trend trader would do. So if you do so based on moving averages as in the earlier mentioned example, then all of your trades should only be in that direction. Therefore, if the trend is actually bullish, take long trades off swing bottoms and turn to exit off swing tops rather than shorting them.
Several years ago I wrote an exercise document called the Guidelines that does just like I’ve described in this article. We first identify the current weekly trend based on the most recent formation of a regular swing top or bottom with regards to previous weekly swings. After the direction is decided, we turn to only enter the market going’with the trend ‘.
While swing traders will usually apply several indicators in an effort to find out when the short-term swing is occurring, I prefer to use mathematically calculated’turn dates’offering the date as to when these swings are most likely to occur. Once that is known, we simply allow the market to confirm the swing which signals the trade entry.