Trend trading is really a trading approach that offers the potential to reap greater profits by capitalizing on large market moves. You will find two main concerns working with trend trading; either the marketplace is trending upwards (bull trend) or trending downwards (bear trend). For the trend trader to profit, it is very important to correctly identify the trend before a trade is placed.
In regards to trend trading, once the trade has been placed, swing trading the trend trader will most likely stay static in the trade until such time that it appears the overall trend has changed.
Trends occur at different time frames and is visible on various time-frame charts. A pattern trader, being more a long-term trader where trades usually last 2-3 weeks or more, will more than likely define a tendency from analyzing an everyday or greater time-frame chart. Minute charts works extremely well for fine-tuning entry, they certainly wouldn’t be employed for determining the trend.
The time-frame of the charts used is essential to the trend trader. If the trend has been defined on a weekly chart, it’s the weekly chart that ought to be used to determine when the trend has ended as well. As a result, the trader is not exiting a weekly or greater trend just because the trend has changed on the reduced time-frame daily chart.
There are many counter-trend moves that occur in just a complete trend move. They are usually seen on the reduced time-frame charts in respects the time-frame used to define the trend. Like, if a weekly chart can be used to define a bull trend in the SP500 market, you will have moves from this bull trend which is obvious on an everyday time-frame chart. The trend trader would normally stay static in a trade even though the marketplace is moving against the positioning, since it is expected to recuperate soon if the trend remains intact.
Trend traders often use indicators like the moving averages to determine when to enter and when to exit. Like, a tendency trader may buy when the 50-day moving average is greater compared to 200-day moving average, and sell when the 50-day moves below.
For many traders, remaining in a trade when the marketplace is creating a move from the trend direction is difficult to do. You need to stay glued to your guns and avoid reacting to the marketplace since it moves to erode your accumulated profits if you want to be successful as a strict trend trader.
The other kind of trader to consider is the Swing Trader. Swing traders usually trade off the daily time-frame or lower (minute charts). Swing trading is all about following the market’s most likely current direction. For new traders, swing trading can be quite a far better approach as a result of shorter period of holding a trade and usually less exposed in risk capital. Swing trading is recognized as by many to be an easier and less stressful way to enter the markets.
The swing trader will most likely go long when the short-term market is confirming a swing bottom and looking to move up, and going short when the marketplace is confirming a swing top and looking to move down. Thus whilst the trend trader may be holding an extended based on a bullish weekly trend, the swing trader could be either long or short during this same period due to the direction the marketplace happens to be moving in the reduced time-frame.
With trend trading, the cons are clear. You must enable possible large moves against your position when the trend is in a counter-trend phase. With swing trading, the cons will also be clear. While the overall market is trending in a single direction, the swing trader will occasionally be trading from this trend which is often wrought with greater risk than trading with the overall trend.
Therefore, when contemplating the negative areas of both trend trading and swing trading, you will want to simply use the best of both?
In order to do that, it is very important to determine first the overall trend direction much like the trend trader would do. So should you choose so based on moving averages as in the earlier mentioned example, then your entire trades should only maintain that direction. Therefore, if the trend happens to be bullish, take long trades off swing bottoms and check out exit off swing tops as opposed to shorting them.
Several years ago I wrote an exercise document called the Guidelines that does just like I have described in this article. We first identify the present weekly trend based on the most recent formation of a weekly swing top or bottom in relation to previous weekly swings. After the direction is set, we check out only enter the marketplace going’with the trend ‘.
While swing traders will most likely apply two or more indicators in an effort to determine when the short-term swing is occurring, I prefer to use mathematically calculated’turn dates’offering the date as to when these swings are most likely to occur. Once this is known, we simply allow the marketplace to verify the swing which signals the trade entry.