The Trend is Your Friend
I published an article on the above subject in my previous blog. I read it again and I have to say what I written remains valid. I edited it slightly but the message of the contents remain same.
Trading is a game of probability. When we put on a trade, we would not know with certainty whether our trade would work out as expected. We could make or lose money or our money could get stuck. There is no certainty in trading.
We can however put the probability of our trade in our favour by trading in the direction of the trend. The trend is your friend. This is one of the truth in trading. The question is how can you tell that the trend is there and which direction is likely to go?
KLCI Weekly Chart on 12 Jun 09
The easiest way to determine the trend is by looking at price patterns on the price chart. A pattern of higher highs and lows depicts an uptrend, lower highs and lows depicts a downtrend and comparable highs and lows depicts a sideway pattern.
KLCI weekly chart above showed clearly that KLCI was in a downtrend from early Jan 08 to end Oct 08 from the pattern of lower highs and lows. KLCI stopped making new low in mid Dec 08 suggesting that the downtrend could be ending. KLCI was in a sideway pattern from early Nov 08 to mid Mar 09 from the pattern of comparable highs and lows. KLCI made a higher low in mid Mar 09 clearly suggesting the start of a new uptrend. KLCI has since been in an uptrend.
The shortcoming with this method is we need at least 2 highs and 2 lows to establish the trend. The trend would have been too far underway for us to take advantage of.
To overcome this we can anticipate the 2nd high or 2nd low by looking at technical clues. For example after a stock has made a new high and undergone correction, we can anticipate the second low by looking at bullish reversal candlestick patterns. A take-out of the potential second low price bar high would provide an early indication of an uptrend instead of waiting for the 2nd high to be established.
Next draw a trend line connecting the lows when the lows are getting higher or highs when the highs are getting lower. When the trend line is up the trend is up and when it is pointing down the trend is down.
To complement our trend analysis we can look at the slope of a moving average (MA) line. This makes our analysis more objective. When the slope of the MA is rising the trend is up, when it is declining the trend is down and when it is flat the trend is sideway. The question is which type of moving average should you use and what is the length.
I use simple moving average(SMA). For swing trading, I use 20-week SMA on weekly chart to determine the long-term trend for trade direction, 20-day SMA and 10-day SMA on daily chart to determine the intermediate-term and the short term trend respectively for trade entry.
The KLCI weekly chart showed KLCI has been in an uptrend since early Apr 09 as indicated by the rising 20-wk SMA line.
For day trading I use 20-period SMA on the 30-min chart to determine the day trend direction and 10-period and 20-period SMA on the 5-min chart for trade entry. The choice is personal. Test the various type and length of MA, and, choose one that suits you.
You can use ADX to assess the trend strength but I hardly use ADX.
Disclaimer:
Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
Trading is a game of probability. When we put on a trade, we would not know with certainty whether our trade would work out as expected. We could make or lose money or our money could get stuck. There is no certainty in trading.
We can however put the probability of our trade in our favour by trading in the direction of the trend. The trend is your friend. This is one of the truth in trading. The question is how can you tell that the trend is there and which direction is likely to go?
KLCI Weekly Chart on 12 Jun 09The easiest way to determine the trend is by looking at price patterns on the price chart. A pattern of higher highs and lows depicts an uptrend, lower highs and lows depicts a downtrend and comparable highs and lows depicts a sideway pattern.
KLCI weekly chart above showed clearly that KLCI was in a downtrend from early Jan 08 to end Oct 08 from the pattern of lower highs and lows. KLCI stopped making new low in mid Dec 08 suggesting that the downtrend could be ending. KLCI was in a sideway pattern from early Nov 08 to mid Mar 09 from the pattern of comparable highs and lows. KLCI made a higher low in mid Mar 09 clearly suggesting the start of a new uptrend. KLCI has since been in an uptrend.
The shortcoming with this method is we need at least 2 highs and 2 lows to establish the trend. The trend would have been too far underway for us to take advantage of.
To overcome this we can anticipate the 2nd high or 2nd low by looking at technical clues. For example after a stock has made a new high and undergone correction, we can anticipate the second low by looking at bullish reversal candlestick patterns. A take-out of the potential second low price bar high would provide an early indication of an uptrend instead of waiting for the 2nd high to be established.
Next draw a trend line connecting the lows when the lows are getting higher or highs when the highs are getting lower. When the trend line is up the trend is up and when it is pointing down the trend is down.
To complement our trend analysis we can look at the slope of a moving average (MA) line. This makes our analysis more objective. When the slope of the MA is rising the trend is up, when it is declining the trend is down and when it is flat the trend is sideway. The question is which type of moving average should you use and what is the length.
I use simple moving average(SMA). For swing trading, I use 20-week SMA on weekly chart to determine the long-term trend for trade direction, 20-day SMA and 10-day SMA on daily chart to determine the intermediate-term and the short term trend respectively for trade entry.
The KLCI weekly chart showed KLCI has been in an uptrend since early Apr 09 as indicated by the rising 20-wk SMA line.
For day trading I use 20-period SMA on the 30-min chart to determine the day trend direction and 10-period and 20-period SMA on the 5-min chart for trade entry. The choice is personal. Test the various type and length of MA, and, choose one that suits you.
You can use ADX to assess the trend strength but I hardly use ADX.
Disclaimer:
Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
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