Learn how to spot trend trading signals and build a profitable trend trading strategy. In this guide, you’ll learn how to identify a trend in real-time and follow the trend successfully. After you master the trend with proper training, you will also be able to spot changes in the trend direction. As a bonus, we’re also going to reveal some secrets to successfully counter trend trade.
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Identifying a trend after the fact is easy. The struggle comes when you try to identify a trend as it’s developing. A lot of the trend trading books will only teach you how to spot the trend when we’re already midway through it.
That’s not an ideal trade scenario!
Michael Covel a bestselling author is the biggest proponent of trading with the trend. “The Complete TurtleTrader,” and “Trend Commandments – Trading for Exceptional Returns” covers strong evidence of how one can become a millionaire by simply following the trend.
Keep it simple and trade with the trade seems to be the devise of many successful traders.
For those of you who want to learn how to trade with the trend keep reading on.
We’re going to start with the basic principles of trend trading and then move forward with some trend rules to help you ride the market trends like a pro.
What is Trend Trading?
Trend trading is a methodology that aims to make a profit through the examination of an instrument’s momentum in a particular direction. When the predominant price move is showing a particular direction, either up or down, that is called a trend.
How to define a trend?
The standard definition of a trend, according to the Dow theory is a series of higher highs followed by a series of higher lows which defines an uptrend. Conversely, a series of lower lows followed by a series of lower highs defines a downtrend.
This implies that the trend never moves in a straight line.
But, the trend takes the shape of a zigzag movement.
Our little slogan inspiration for traders is “keep it simple, stupid!”or KISS.
We don’t believe making trading more complicated than it already is.
So, here is the rule of thumb to identify the market trend with your naked eye:
- If you see on your chart screen the price rising from the bottom left corner to the upper right corner that’s an uptrend or bullish trend.
- If you see on your chart screen the price falling from the upper left corner to the bottom right corner that’s downtrend or a bearish trend.
- If you see on your chart screen the price moving up and down all over the place, we’re most likely inside a consolidation period. In this case there is no trend going on.
This is the basics of trend trading.
Now, let’s see the importance of trading with the trend:
Why use Trend Trading?
If you want to learn how to invest in stocks, or how to trade Forex, you need to have these skills to detect the trend direction. It doesn’t really matter if you’re a swing trader, or a scalper, or a day trader.
No matter of your preferred time frame you need a trend to be put in motion if you want to make a profit.
The scale of the trend doesn’t really matter.
However, the bigger the time frame, the stronger the trend is.
That’s where the expression “the trend is your friend” comes from.
This expression has been the core stone of many trading strategies.
Trading with the trend gives you the advantage of eliminating some of the flaws that inherently all trading strategies have.
We haven’t found the perfect trading strategy yet.
Maybe you have found it!
But a 100% win ratio trading strategy is a myth.
So, as long as you trade in the direction of the trend, even if you’re wrong on your timing, the forces that drive the trend will ultimately work in your favor and eliminate some of the risk.
Everything will fall into place when you trade with the trend.
Secondly, identifying strong trends can lead to potentially make bigger profits.
There are more pips available in the direction of the trend than counter trading.
Please notice the difference of the available pips when trading with the trend compared when you go against the trend.
Pretty obvious which side the winners are.
Ever wondered how to use trend indicators to generate buy and sell trade setups?
Let’s see what are the best trend indicators to identify the direction of the trend:
Trend Trading Indicators
In the technical analysis field, trend indicators are tools designed to help you see the general direction of the market. These technical indicators can help you filter and confirm buy and sell trend signals.
Trend indicators are good at eliminating market noise and give us a better picture of the market trend.
Also, read about the Best Forex Indicators to Generate Buy and Sell Signals.
If you want to upgrade your method on how to identify a trend you can use an old trend filter used by legendary hedge fund managers. Professional traders and well-established hedge fund manager uses the key 200-day moving average to establish the direction of the trend.
Billionaire trader, Paul Tudor Jones one of the greatest traders of all time has revealed his trend filter tool as being the 200-day moving average:
“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
In other words, if the price is above the 200-day EMA we’re in an uptrend. Conversely, if the price is below the 200-day EMA we are in a downtrend.
Every trader needs to know how to assess the strength of a given trend and asset.
And, one of the best trend indicators that can help you correctly identify how strong or weak a trend is the Aroon Oscillator.
Check out top three trading strategies based on Aroon indicator, which you can use to gain more profits.
You can add to your trading arsenal these trend trading indicators
With a little bit of experience you can train your naked eye to spot trends instantly.
But, the struggle many trend traders face is to exactly pinpoint entries and exit points in order to ride the trend.
What if we can help you to develop one simple trend trading strategy that will generate high probability entry signals?
Below we’re going to share with you a simple and one of the best trend trading setups:
How to Trade Trends – Trend Trading Strategies
The core of this trend trading system relies on capturing those explosive price movements in the direction of the trend. This trend trading strategy guide will teach you how to increase your risk-reward ratio. Mastering trend trading
Here is the first rule of this trend following strategy.
This will teach you how to define trends like a hedge fund manager.
To eliminate any element of subjectivity, simply throw on your chart the most influential moving average aka the 200-day EMA.
How to determine the trend direction using the 200-day EMA
Are we in an uptrend or a downtrend?
It all comes down to how price is positioned relative to the 200-day moving average:
- If the price is above the 200-day MA, then we’re in an uptrend
- If the price is below the 200-day MA, then we’re in a downtrend.
Not all trends are created equal.
Some trends are stronger than others.
In order to assess the strength of the trend, we’re going to use another tool aka the Aroon Oscillator.
When the Aroon Up, which measures the strength of the trend, crosses the Aroon down, a buy signal is generated.
When the Aroon up line is close to the 100 level, and the Aroon down line is close to the 0 level, then the market is in a strong bullish trend.
A trend trading strategy is not complete without a stop loss and a take profit order.
So, how to set your stop loss in a trading market?
As a trend trader you have several options at your disposal.
The key is to take advantage of the best stop loss strategy.
For example, if the price is too far away from the 200-day MA, it doesn’t make sense to place your SL above/below the moving average.
To counter this issue, we can use the trend price structure.
What do we mean by this?
Let me explain…
An uptrend is formed by a series of higher highs followed by a series of higher lows.
So, the ideal place to hide your protective stop loss in an uptrend is below the most recent higher low swing point.
This approach makes a lot of sense.
Here is why.
A technical break below the most recent swing low is a warning sign that the market is starting to develop lower lows. This is a break in the previous price structure.
We know that lower lows are found in downtrends. So, it makes sense to exit our trades if we’re buyers.
Let’s now answer another critical question when you try to develop a trend trading strategy.
How to take profits in a trading market?
The best take profit strategy in a trading market is to ride the trend until it ends.
But, we know most traders don’t have the right amount of discipline to ride the trend for months or even possibly years.
We need something that is suitable for the psychological makeup of the retail trader.
Our take profit strategy revolves around the Aroon oscillator.
Let me elucidate on this…
When the Aroon Up crosses below the Aroon Down we like to take profit and liquidate our positions.
In the financial markets, we know that the trend will always end.
In other words, what goes up, must come down.
Uptrends and downtrends are always followed by counter trends.
But, how to properly trade against the trend?
Counter Trend Trading Strategy
“The trend is your friend except at the end when it bends.” – Ed Seykota
Get into the mind of the most successful traders and Hedge fund managers by checking the Top Trading Quotes of all Time – Learn to Trade.
Top market wizard Ed Seykota is the father of computerized trend following systems and one of the best traders of our times. He acknowledges that in order to be great at this game you also need to identify counter trend moves.
We can all learn a valuable lesson from him.
After all, his trading rules have helped him turn $5,000 into $15 million over a 12-year period.
That’s pretty amazing if you ask me.
Let’s now see if you know what is counter trend trading?
If your answer is: a price move, usually smaller in nature, that is opposite to the prevailing trend, is a counter trend move.
Because a counter trend move will usually generate a small amount of pips we need to get in as close as possible from the very start of the counter trend move.
Using reversal chart pattern can help us learn how to spot counter trend trades.
Check the Essential Guide to Chart Patterns: HERE.
Only take a counter trend trade if it passes this 3-step test:
- A reversal chart pattern showed up on the chart.
- The confirmation of the pattern.
- Use best counter trend indicators to confirm the counter trend chart pattern.
Not even the best counter trend trading strategy will work for you if you don’t use proper risk management and exercise discipline.
No matter if you use trend trading vs. counter trend trading strategies makes sure you follow your trading plan.
Final Words – Best Day Trading Stocks
With proper money management, all trend trading strategies have the potential to grow your Forex account relatively fast. The real secret to trend trade successfully is to not close your trade too early. Make sure your trend trade is generating at least a 1:3 risk to reward ratio.
Find out more about the world’s largest capital market in our complete guide to Forex Trading for Beginners.
In the currency market, due to the economic forces at work we can see trends being more prevalent. The long-term trends can last anywhere from a couple of months and can extend into year-long trends. But, most retail traders are only short-term oriented. In this case we’re looking for Forex trends that can last from 3 weeks up to 3 months.
Don’t forget you can make money even with a counter trend trading strategy.
Thank you for reading!
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