Trend Trading For Beginners And Active Traders



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PART 3

Step 2: Trend Trading

Trend Trading is always in vogue. Trend indicators and technical analysis trading have proven to be of sterling value in amassing enormous wealth for those who do it well.

However, to be successful in stock trend trading, education and training about trading indicators are necessary.

Also of ultimate importance is the exercising of a strict code of discipline to your trading rules.

Specific trend trading system rules must be steadfastly adhered to with an unerring regimen and unwavering devotion.

Only then will trend trading become your tool and willing servant in amassing you untold good fortune.

Listed Below Are Some Of The Most Important Edicts Of Trend Trading

  • You must trade in the direction of the Trend. This is the single most important tenet of Trend Trading. This Is The Cardinal Rule Of Trend Trading. Keep it sacred! Do not violate this rule.

    In technical analysis, the trend is your friend. Up to 90% of your technical analysis would be really determined by the trend. So stay with the trend until the trend reverses.

    There are ways discussed later to detect reverses. Not every pull back is a reversal. Identifying and staying with the trend is the biggest part of your strategy. Things in motion usually stay in motion and this is usually true in the stock market.

    In other words, don’t short a rising market unless you get a reversal signal and don’t buy a down market unless you get a reversal signal.

    It is true that you will miss selling exactly at the top or buying exact ly at the bottom. However, once you detect the formation of a trend you will get in early enough to make loads of doe.

    Meanwhile, you will avoid the agony of trying to predict the tops or bottoms, missing them which you will almost always do, and suffering terrible consequences as a result.

    Tops and bottoms are only known after they’ve been made. Trying to predict tops and bottoms is a foolish and dangerous game and you can get your head chopped off.

  • You want to trade in stocks that you also have done some fundamental analysis on to know what the company does and what it’s financial health is.

    There are usually some frothy companies with poor fundamentals that are showing good chart patterns. Be cautious of these because they will eventually succumb to the truth of the state of their affairs and the lousy fundamentals.

    Once that happens, they head back to earth with a ferocity that can hurt very badly unless you were able to see the reversal and got in on that trend by buying Puts.

    Therefore, being informed of the Fundamentals of a company is important for our purpose of technical analysis. Although pure technical analysis does not concern itself with fundamentals, we want to afford every advantage to ourselves and this is an extra layer of advantage.

    So, again, do not buy a stock until you know what the company does.

  • In technical trend trading, you wand to trade in active markets where the daily volume exceeds 500, 000 shares average daily traded for the particular stock that you are interested in.

    Additionally importantly, you want to trade where the action is and not in some dormant stock that is going nowhere even though it may have the greatest fundamentals, the highest volume and be the greatest stock in the world.

    If there is no price momentum, avoid it. We want movement, preferably upward movement.

    A good place to start to look for stocks with price momentum is to look at the stocks that are making yearly highs. There is a daily list of these on almost any stock reporting site.

    Stocks making new highs is an automatic indication that they are on an up trend. Two things usually happen here that are very important in Trend Trading and at the heart of your analysis and execution - A breakout or a pullback.

    The pullback could be just a consolidation to continue on it’s upward trend or it could be a reversal. Identifying a reversal will be discussed later.

    A breakout or a reversal is usually confirmed and powered by above average volume. This is the sweet spot of Trend Trading. This move can be quick and violent. It’s a nice place to be and it makes a lot of money quickly for traders and investors alike.

Terms in trend trading and technical analysis.

An upward trend is signified by daily higher highs and higher lows.
A downward trend is signified as daily lower highs and lower lows.
A reversal to an uptrend is a higher high and closing below the previous low.
A reversal to a downtrend is a lower low and closing above the previous high.
When a stock breaks out, it breaks above what was originally a ceiling for it. When it breaks out, it has no ceiling above it as resistance. The longer it takes to break through a ceiling, and the more attempts it makes, usually signifies a stronger support on the downside.

Price levels that are ceilings on the upside become support once the stock price breaches above that ceiling. Old ceilings on the upside usually become new supports on the downside.

To reiterate:

  • Trade where all the momentum is going. Limit your loses and let your winners run.

  • Intuitively, we want to buy when things are cheap and getting cheaper. Consequently, there is a natural temptation to buy a stock when it is falling because it is getting cheaper. However, the allure of buying just because it’s getting cheaper has hurt many traders and investors.

    When a stock is falling and you buy more is usually dumb unless it is nearing solid resistance and you want to take the chance at preempting a reversal. Don’t do it if it is in free fall. Falling stocks usually stay falling and rising stocks usually stay rising until they signal a reversal.

    In fact, if you are just starting out, don’t even try to preempt a reversal. Buy winning stocks! Get out when they stop winning!

Alright! Alright! Don’t get impatient! So now you know some things about Trend Trading. How do you harness that knowledge to your advantage and have it profit you handsomely?

Good question! Here’s how: by learning and following with a religious and unflinching fidelity some entry and exit rules.

Step 3: Entry Rules: Know How And When To Enter A Position

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  • Entry Rules: Know How And When To Enter A Position
  • Know when to exit a position
  • Risk Management and More..

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