Trend trading is one of the most effective stock trading strategies. It is also one of the simplest methods. Trend trading is a proven way to earn profits since it has been established that for years the markets have moved in trends. With a trend trading system, you can take advantage of both the ups and downs of the market and profit in both environments.
Trend traders take advantage of long term moves that play out in the stock market. Traders that use this method do not try to predict the future direction of the market. They simply jump in and enjoy the ride.
Determining the Trend
Moving averages and channel breakouts can be used to determine the general direction of the market. The easiest way is to open up a daily price chart and apply the simple moving average. The direction of the moving average can be used to determine the direction of the trend. It is important to use multiple time frames when determining this direction. In determining an uptrend, I like to make sure that the 10 day simple moving average is greater than the 20 and 30 day moving average.
Entering a Trade
Don't try to catch the bottom! Wait until the trend probably establishes itself before entering the trade. If the stock is not making higher highs and higher lows, then the trend has not yet been established. It is also important to analyze the trend of the sector. While back testing my trading strategies, I found much better results when trading with the trend of the sector ETF as well.
Exiting a Trade
Get out of your trade once the trend is broken! Cut your losses, and let the long rides make up for these small losses. You can re-enter your trade once the trend has been reestablished.
Risk Management
Trading size should be reduced in periods of high volatility. It is very important to preserve capital until a more positive price trend reappears - not only in the security that you are trading, but the overall market as well.
Use the Trend of the Overall Market
Don't try to fight the trend of the overall market. If the S&P is in a strong uptrend, it would be much riskier to short stocks than it would be to buy stocks. Here is my general rule: If the 10 day simple moving average of the S&P is greater than its 30 day exponential moving average, I'm long. If not, I'm short.
The most important thing to remember is to ALWAYS trade with the trend!
