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Trend Trading

Trend trading is an investment strategy that tries to capture profits through the trend analysis of momentum. This allows for investments in both up and down market. The theory behind trend trading is using technical indicators such as moving averages to determine overall direction. This type of trade generally does not wait for specific entry points but rather participates during the trend.

Trend trading still takes into consideration the market price, volume, and risk reward ratios.  Further technical analysis can help determine minor corrections along the trend. It is similar to swing-trading but positions are generally held for a longer time period. You must be comfortable sitting through any pullbacks and possibly periods of little activity (or sideways movement).

Trend Trading Advantages
One advantage is the additional time an investor has to make their decision, and to participate in a trade within the trend. This can be appealing to individuals who cannot sit in front of a trading screen all day long. Strong trends can run from weeks to months, allowing a nice profit along the way. It is an easier investment strategy for new individuals learning about the stock market.

There are several methods to identify trends but the simplest explanation is; to identify an uptrend prices should move with higher highs and higher lows. And the opposite for downtrends, prices should make lower lows and lower highs. One of the best methods for spotting trend reversals are candlestick signals. It is important to recognize the continuation patterns found in candlestick charting. Candlestick Charting provides the knowledge of how minor price variations can affect the direction of a trend. As the candlestick charts are studied, recognizing the differences will greatly alter investment strategies. Continuation patterns found in candlestick charting help with the decision-making process. Whatever the pattern, a decision has to be made--even if the decision is to do nothing. Your trading strategy should specify the conditions necessary for entering and exiting trades.

Trend trading is a very effective trading strategy for equities, the currency market, and futures and commodities. It is so popular it has its own market maxim, ‘The trend is your friend’. A certain percentage of the time the markets do not show a definitive trend but rather trade sideways in a ‘trading range’. (Based upon recent price history.)

As in life, so goes trading, and all good things must come to an end. The longer the trend has been in effect the easier it is to identify reversal signals, or congestion, and it is time to take your profits.

For additional understanding of Trend Trading, Review the training tutorial on Trend Analysis; the very same procedures Stephen Bigalow uses each day for analyzing the market trend.


Market Direction: Candlestick patterns have an extremely important function. They allow you to understand what is occurring in investor sentiment. This may seem like a very simplified statement but there are some very powerful ramifications for having that information. Did you not feel great fear and panic the day the Dow was down 777 points? Didn't you feel much more confident when the market was up almost 500 points the next day? When the market was down over 200 points yesterday, what were your emotions doing? Were they a lot different than when the markets came back up and only closed off 19 points? This past three months, the market would go up for two or three days. The following two or three days the markets would go down. Did your moods change with the markets? Most investors' mental perspectives become altered by which direction the market appears to be moving.

Being able to identify candlestick patterns keeps investors from being emotionally and economically whipsawed. It is relatively easy to have your investment trading plan change dramatically with the daily conditions of my market. Candlestick patterns make assessing the overall market trend much easier to identify. As discussed in previous newsletters, it has been pointed out that the Dumpling Top pattern in the Dow has remained the predominant analytical factor. A 777 point move to the downside followed by a 500 point move to the upside would usually constitute the big reversal at the bottom of the trend. This would be true had the identification of a candlestick pattern not come into play. The Dumpling Top is a very easy visual pattern. The round top signifies that investor sentiment is slowly moving to the downside. Once the overall pattern is identified, the expectations of what should occur following individual candlestick signals become much more pronounced.

The 500 point move to the upside formed a Bullish Harami. It closed right at the tee line. What should be expected for starting a bullish trend after a Bullish Harami? The continuation of the bullish move! As we saw, the trading of Wednesday immediately took the Dow down 200 points. Obviously, this was not the bullish sentiment required to indicate that the trend has reversed. The close at the higher end of the trading range produced a Doji day. Once again, the trading was right at the tee line. What is one of the simple rules of a Doji? The trend will usually move in the direction of how they open it the next day. Today's pre-market futures indicated once again that the Bulls were not participating; the Bears were still in control. Lower trading revealed two simple facts. The first being that the tee line was still acting as resistance. Add this to the fact that the Dumpling Top had not been violated, it became quite evident that the downtrend was still in progress.

Candlestick analysis allows you to add all the pieces together to produce a viable evaluation process. The analysis of a trend can be fine-tuned by understanding what pieces of the trend should be doing. Has this been a market to make money? Definitely not! The point of investing successfully is to find indicators that reveal an increased probability of being in the right position at the right time. When those indicators do not demonstrate which way price movements are going, that is time to step back and analyze the trend direction in general. There will be times when the markets are telling us not to be in the market. There will be times when the market is telling us that very quick swing trades are a viable trading platform. There will be other times when holding long or short positions for an extended period of time is the most beneficial. The advantage provided by candlestick analysis reveals what the investor sentiment is showing to be as the force that moves price directions.

DOW

The last few weeks, the Candlestick Forum has been recommending being very nimble with long positions and having short funds in the portfolio. Although this may seem like a very bland trading program, it has worked relatively successfully. That means there haven't been any great profits from trying to establish long positions, being in and out of positions very quickly, while at the same time being long the 'short' funds has offset any small losses that may have occurred when establishing long positions. When the market produces conditions of indecisiveness, being able to maintain the account with small gains keeps the funds available for when the market makes a definite move one way or the other. And the market will make a move one way or the other.

Dollar chart

 

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Good investing,

The Candlestick Forum Team


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