5 Methods for Identifying and Entering the Trend

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.

20 Period Exponential Moving Average

A 20 Period Exponential Moving Average (in blue) helps quickly identify the larger trend. Using a 5-min chart, the 20-EMA keeps us aware of the larger trend.

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.

Fibonacci Retracements

Entering a trade at a 50% Fibonacci retracement is a low risk method of getting into the trend. This allows you to enter on a pullback rather than chasing the market.

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.

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  1. I like your definition for uptrend and downtrend at the start of the article. The time frame I am working with is the long-term one: months and years.

    Yes, moving averages are great to look at the trend and recognize turning points. Here are the methods I am using to identify the trend.

    I use three different moving averages trend signals based on daily closing prices of stock marker indices:
    1) 200-day versus 50-day (MA200/50)
    2) 250-day versus 100-day (MA250/100)
    3) Customized signal (MATI) based on different moving averages that is optimized to indicate earlier a new uptrend than the MA200/50.

    Besides these 3, I also use a trend signal that is based on the patterns in the monthly closing price of stock market indices.

    Maybe I should test these signals in shorter time frames as well. I’ve never considered that. Thanks for the article.

    • I think the longer the time frame the stronger the signal. When you start getting into the smaller micro time frames like a 512t or 5-min chart there are many more false signals with trend following systems.

      Thanks for sharing your strategy.

  2. Tim regarding fibs. When a traditional hits the -23.6 but not the -61.8 whether it is on a daily or a 15 minute, would you draw an extension?

    Or does an extension only get drawn when the -61.8 is hit? Keep up the great work. Appreciate your helpful and positive attitude, absolutely refreshing.

    Thx,
    Steve

    • Correct Steve. You only draw an extension (from highs to highs or lows to lows) if we break through a -61.8% target.

      Great timing on your question, I’m actually publishing my trading rules and setups later this week so stay tuned for that!

  3. Great Tim and when you say break through, could you clarify. I don’t want to split hairs; but there is a difference between touch, pierce, and “close” above or below a -61.8% target.

    • Before I start drawing extensions I require the traditional 50% retracement to trade to its -61.8% line (or close to it). If we break the -23% target by a few ticks I will continue to draw traditionals.

  4. Hello Tim,

    I have a question you mentioned:

    “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.”

    Will these high and low of the day serve and resistance and support levels for the next day?

    Thanks, I am still learning.

    • On a 5 or 15-min chart, not necessarily, but repeating the exercise on a daily chart absolutely. I place more weight on the larger time frames in terms of the trend.