5 Methods for Identifying and Entering the Trend

[TimRacette 11]

You've probably heard the saying “the trend is your friend until the end.”

 

In this post I outline techniques for identifying the trend, getting in, and staying in until it fails.

How do we Define a Trend?

 

An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows.

 

As an exercise, each night print out a 5 or 15-min chart of the market you are trading and identify the key highs and lows of the day. After a few weeks you will become better able to define the trend during the day.

 

Methods for Identifying the Trend

1. Moving Averages

 

Regardless of the time frame you’re trading, moving averages are a great way to quickly identify the general trend of the market. I place more weight on larger time frames such as the daily and weekly and then look to trade with that trend on the smaller intraday time frames.

 

A 20-period Exponential Moving Average is a great tool for intraday trading.

 

2. Candlestick Patterns

 

As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment and trends. The candlestick pattern is made up of an open, close, high, and low price. These candlestick patterns have a lot more to say as compared to a bar chart. To get an even clearer picture of the trend try switching to a Heikin Ashi chart.

 

Methods for Entering the Trend

1. Fibonacci Retracements

 

Buying on a retracement as opposed to chasing the market is a great way to enter a trend. This reduces the likelihood that your stop will take you out. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long.

 

 

I outline specific rules for using Fibonacci retracements in my trading rules.

 

Entering a trade at a 50% Fibonacci retracement is a low risk method of getting into the trend. This allows you to enter on a pullback rather than chasing the market.

 

2. The NYSE Tick

 

This is by far my favorite tool for intraday trading. To learn more I will refer you to my prior post on the NYSE Tick.

 

3. Reversal Patterns

 

Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend is a great way to get in the new trend close to a reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio.

 

Whether you’re an intraday trader or use a weekly chart, being able to identify the trend, get in, and stay in will yield the greatest return over time.

 

If you'd like to read about my setups and how I trade the ES & 6E you can do so here.

 

Do you have other methods for identifying the trend?

[Xiao si 10]

My favorite way is to enter after a pullback, such as a flag or small wedge. Even better is to enter during a retest or at the top trend line of a flag. I find the moves thru resistance of a flag or wedge can be quite explosive and i want to be in the trade before that happens. I try to find,(i.e. wait) a low risk setup to do this. Fibb is ok, but i would use the 50% more than anything. I also use volume and the Time and Sales to help confirm the conviction of ull vs bears during the pull back and subsequent action.

 

Cheers,

 

 

XS

[Xiao si 10]

Saw your site and grabbed your PDF....i like the simplicity. Simple methods alwats work best. Have you back tested this?

 

XS

[TimRacette 11]

Yeah entering a long on a halfway back retracement (Fib 50% Line) with a corresponding low tick is a great entry. Flipped for shorts with a corresponding high tick. I have a ton of live data that I input into StockTickr from my trades that I use to continually fine tune and tweak when I discover new things.