You’ve probably heard the saying…
“The trend is your friend until the end”
In this post I outline techniques for identifying the trend, getting in, and staying in until it fails.
How do we Define a Trend?
An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows.
As an exercise, each night print out a 5 or 15-min chart of the market you are trading and identify the key highs and lows of the day. After a few weeks you will become better able to define the trend during the day.
Methods for Identifying the Trend
1. Moving Averages
Regardless of the time frame you’re trading, moving averages are a great way to quickly identify the general trend of the market. I place more weight on larger time frames such as the daily and weekly and then look to trade with that trend on the smaller intraday time frames.
A 20-period Exponential Moving Average is a great tool for intraday trading.
2. Candlestick Patterns
As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment and trends. The candlestick pattern is made up of an open, close, high, and low price. These candlestick patterns have a lot more to say as compared to a bar chart. To get an even clearer picture of the trend try switching to a Heikin Ashi chart.
Methods for Entering the Trend
1. Fibonacci Retracements
Buying on a retracement as opposed to chasing the market is a great way to enter a trend. This reduces the likelihood that your stop will take you out. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long.
2. The NYSE Tick
This is by far my favorite tool for intraday trading. To learn more I will refer you to my prior post on the NYSE Tick.
3. Reversal Patterns
Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend is a great way to get in the new trend close to a reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio.
Whether you’re an intraday trader or use a weekly chart, being able to identify the trend, get in, and stay in will yield the greatest return over time.
Do you have other methods for identifying the trend?
I’d love to hear from you.