Trend Following Strategies: Riding The Momentum For Mexican Profits – Trend trading is probably the most popular way for traders to generate trading signals. Traders expect that by using trend trading methods they will be able to realize large winning trades by catching long trending movements. In this article, I introduce five common and powerful ways to find trend trading opportunities and I will take you through the study of different charts to increase your understanding of trend trading in general. What is Trend Following As the name suggests, using the trend trading method, traders first identify the market with an existing trend and then they search for profitable trading opportunities when the trend continues. The first challenge, therefore, is to identify the trending market, and here the trader can use different trading tools and concepts that we have explored in different articles: Identifying the direction of the trend The benefit of trading according to the trend is that when the trader is. Able to catch long trending movements, the profit potential can be huge. Another important aspect of trend trading is that traders must realize that as a trend trader, you will not be able to catch all trend movements. Since trend-following traders must wait for the trend to form first, by definition, they cannot catch the first part of the trend. Especially new and inexperienced traders make the mistake of trying to predict when a new trend will emerge before there are real signs that there is a trend. This speculative thinking can be dangerous because traders are tempted to trade too quickly and then realize unnecessary losses. Waiting for trends to emerge and being patient are important skills that trend traders must develop. But now let’s get into the practical part of this article and let’s explore the five trend trading strategies that I have chosen. The strategies in this article are not exhaustive and I recommend using them as inspiration to create your own trading strategy based on the ideas mentioned. Also, a solid backtest is recommended at the beginning, before you move into demo trading and, finally, real money trading to evaluate effectiveness. Chart Pattern Continuations The classic method of trend continuation trading uses chart patterns and price action concepts. Chart patterns are so-called connectors because they connect trend periods during market trends. The trend does not move in a straight line and the price usually goes back and forth. Chart patterns can often be found during corrective trend phases as the trend is stalling. A breakout from a chart pattern often signals a continuation of the trend. In the screenshot below, we can identify a downtrend (downtrend) as the price is moving lower. During the overall trend, we can observe the downtrend period. The first phase showed the nature of the rectangle with horizontal support and resistance range. As a trend trader, you want to avoid trading within a sideways fix because the price just bounces up and down. Ideally, the trader is waiting for the price to close below the support level before trading the trend. Currently, the price is showing a flag consolidation pattern. A flag pattern is defined by a diagonal trend line that runs against the prevailing trend. The price just breaking out of the flag, signaling the continuation of the potential trend. After the breakout, the trend continues and the trend has progressed lower. Moving Average Channel Although many traders believe that price action trading is superior to indicator signals, I will not ignore the power of trading indicators and even some of the best traders of all time are using indicators in their trading. In the following chart, I used a moving average channel consisting of two moving averages with the same 20-period configuration; One is used for high and one for low. You can easily set this up in your Tradingview by opening the settings of moving averages and changing the “source” to high and low. Moving averages are the perfect trading tool for trending markets as they often describe powerful trends. In the screenshot below, we can see that the uptrend is advancing above the moving average channel. Trend-following traders are looking for signals when the price is moving back into the channel and then they trade the rejection away from the channel. As we follow the trend, we can see many cases when the price moved back in the channel and then rejected the channel before advancing higher. Such a sign may provide a great opportunity to follow. The benefit of using the indicator is that the signal is 100% objective. New and inexperienced traders often struggle with the nature of pure price action trading; Indicators may be a good addition to your arsenal if you are looking for an objective tool to inform your decisions. Trendline Bounce Trendlines, as their name suggests, are trading tools that are used only for trending markets. Trendlines describe trending periods where traders connect lows in uptrends (and highs in downtrends). For the trend line, you need three touch points to be accurate. In the scenario below, we connect the first two low points of the uptrend. Now, the price is back in the trend line for the third time and is testing the support level. Traders who follow the trend are waiting for a signal that the trend line is holding as support to start trading with the trend in the direction of the trend. Trendlines are also a great tool to use within a multi-period approach where traders identify trend lines on higher time periods (daily or 4H) and then look for chart patterns and reversal signals on lower time periods (1H or lower). Trendlines are a great tool for trend trading because, by timing the trade around the trendline, the trader is waiting for the price to pull back significantly rather than chasing the price as it moves in the direction of the trend. As a result, traders are able to buy trending markets at a discount at significantly lower prices, optimizing their reward: risk ratio. Pivot Point Trend-Following Although pivot points are considered indicators, they are more than that because they are using important price components. The center point that I have enabled in the following chart is to provide the average price of yesterday’s price action. As a trend trader, using daily moving averages is important for your overall understanding of the trend environment. In the screenshot below, the price is first in an uptrend on the left. During an uptrend, the price trades above the pivot point, and each new pivot point is higher than the previous point; Therefore, the pivot point can confirm the market trend. On the right side, we now see two lower pivot points in a row. Changes in the direction of pivot points can often foreshadow changes in the trend environment. During the new downtrend, the price continues to enter the pivot point and continues to decline. Such a pivot point test may be used as a trading signal in a trend-following strategy. The downtrend continues, showing repeated rejection signals at the pivot point. In the correct way, the price has now started trading above the pivot point. A prolonged price move above the pivot point can be the first sign that the previous downtrend may be coming to an end. Stochastic Riding When traders think about stochastic indicators, they first think about trading overbought and oversold signals. But what if I tell you that this is a wrong and dangerous way of using the STOCHASTIC indicator? The STOCHASTIC indicator is a pure momentum indicator which means that the STOCHASTIC analyzes how strongly the price and trend move. Therefore, a high STOCHASTIC signals a strong trending market. STOCHASTIC RESISTANCE would be a wrong decision. In the screenshot below, I placed the STOCHASTIC indicator below the price chart and, as you can see, the bullish trend is growing because the STOCHASTIC is above the 80 level, which most traders would call overbought and look for shorting opportunities. Of course, this may be the wrong trading plan. Let’s follow another chart study by looking at the STOCHASTIC indicator. The price broke above the horizontal resistance level and the STOCHASTIC indicator soon moved into the “overbought” zone, above 80. At this point, the indicator is a sign of a strong market trend. From now on, looking for bullish trading signals may provide better trading opportunities. As we can see, the trend continues for a long time while the STOCHASTIC is above the 80 level. Do not abandon the indicator too quickly and, instead, try to understand its true meaning. The STOCHASTIC indicator is the best example of how traders often have a misconception about their trading tools and then believe that they “don’t work”, while they use their tools in the wrong context. The last word when it comes to
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