Trend trading is not a new idea, but many traders try to be a hero by picking tops or bottoms. However, the safer money is always in the trend. So how do you identify a good trend for trading? What trend trading systems or strategies are effective? Read on, this section will cover the basics and follow on with a bunch of useful systems that you can modify or simply use as ideas to get you started.
Identifying a Trend to Trade
In it’s most basic form a trend is determined by a series of higher lows and higher highs, or lower lows and lower highs. As price begins to trend and fluctuates within the smaller time frames, a trend develops as new money enters or exits the market.
Here is a simple example of a down trend, which has smaller corrective upward trends within it. All of these can offer trading opportunities, if you spot them at the right time.
One of the things which trend trading offers is a clear guide on where you can place stop losses. As a trend develops, the last low or high is an obvious place to get a stop in. Because if price reverses past them, the trend could be over.
However, you should spend some time studying in real time, and combining your entries and stops with horizontal support and resistance, as often stops are hunted, the most obvious place traders will place them is beyond the last low or high.
If you only take entries that come near to previous important highs or lows, and use those as initial stop levels, you may have a better chance of staying in the trade.
Here is an example of a trend forming after a reversal at a previous high resistance. You can see the tests of the high, then it begins to fall away. The line show the breaks of the first low to get in, and depending on your risk management, you can place a stop accordingly.
Strategies for Trend Trading
The example above is obviously cherry picked. There are times when a trend is not obviously forming. The market can become “choppy” and corrective. BY limiting yourself only to the trends which move away from a decent support or resistance, you are giving yourself a better chance.
Below are some articles, systems and indicators which can help you get started building your trend trading system.