Hi, a friends in this article I am going to write about trend trading, its setups, how to use it, and how to get confirmation.
What is trend trading?
it is a type of trading where you can benefit from large one-side moves in the market and can ride your position until the trend reverses against your trade. You do not need to monitor your position on a daily basis and you can stay in that position until the trend reverses. It works on both the upside and downside and the rules are the same for both sides of trend trading. Trading a larger timeframe is best for spotting the trend.
How to spot trends on a chart?
Normally the new trend starts after a consolidation or range-bound stage. This means that the price stays in a range for some time and breaks out of that range to start a new trend. This range could be of 50, 100, or 200 days, etc. Bars depend on the time frame you trade so in order to spot which stock or index is trending, you can scan for the high or low breakout of 50/100/200 bars or 52 weeks high or low. If a stock or index is breakout (up or down) from 50/100/200 candles or 52 weeks then it will be considered that it is a trend.
Another known way to look for a trend is to check if a stock or index is making higher highs and higher lows for an uptrend and lower highs and lower lows for a downtrend. These highs and lows are also called pivots. You can also measure this by the slope of EMA21, ma50/100/200. Higher/steeper the slope, the stronger the trend.
Consolidation doesn’t mean that it will break on the upside always. It can break either side of the condition range so be prepared for it.
How can we measure the strength of the trend?
You can measure the strength of a trend by the position of the price and momentum. Here is what I mean:
Price position above EMA10, EMA21 and MA50
- Strong trend – if the price is rising and doesn’t touch or close below EMA10
- Healthy trend – if the price is rising but taking support at EMA21 and bouncing back up.
- Moderate trend – if the price is rising and often penetrating EMA10 and taking support at MA50
Momentum (Length of candles) also defines the strength of a trend. The longer the candle indicates, the higher the momentum, thus the stronger the trend. The shorter the candle, the lesser the momentum thus trend is not so powerful and may fade soon. Often before the stock/index peaks out, you will see smaller up candles and bigger down candles which shows the strength of the uptrend is weakening and there may be a possibility of a reversal. Treat that as a signal to stay cautious in longs (BUT wait for a price confirmation before entering shorts).
How to find an entry:
There are 2 methods to enter:
- Breakout: for a daily time frame if you want to find an early entry for long trades, then check the following parameters and initiate a buy 1 tick above the breakout candle high –
- Price should be breakout out of 20 days high.
- The price should be above EMA21.
- Volume should be above 20 days on average.
- Pullback:
Another way to get an entry is to wait for the first pullback to EMA21 and if the price gets rejected by EMA21 and if it breaks the previous day’s high, then enter a long 1 tick above the previous day’s high. This is a more reliable and stable entry with lesser risk. In this case, SL would be below EMA21 Or below the low of the previous day’s candle whose high was broken and you took entry. Sometimes the price (current candle) breaks the previous day’s low, also penetrates the EMA21, and then the same day it breaks the previous day’s high – this even better entry and has more chances of success. Never miss these opportunities.
Note: for stronger trend trading, you can look for 50/100 days or 52-week high breakout stocks or indexes. For short positions, the setup would be absolutely opposite to what I have explained above.
How to ride the trend:
Uptrend: once a trend is established, look for a pullback on low volume to EMA21 and look for price getting rejected by EMA21. Watch out for pin bars, bullish engulfing, dragonfly Doji, morning star, or any other bullish reversal candlestick patterns.
Downtrend: once a trend is established, look for a pullback on low volume to EMA@! And look for prices getting rejected by EMA21. Watch out for shooting stars, dark cloud cover, bearish engulfing, gravestone Doji, evening star, or any other bearish reversal candlestick patterns.
STOP LOSS:
UPTREND: the initial stop loss should be always below the low of the last pivot or EMA21
DOWNTREND: above last pivot high or EMA21
Later on, you can trail it as per the use of fractals’ lower band and higher band.
TARGET:
Targets are open until the trend bends or at least 1:2 risk rewards.
The trend usually bends or changes when it penetrates and closes below the recent pivot low (Uptrend) and above the recent pivot high (Downtrend).