The Best Online Trading Secrets

For some people trading the trend is a very lucrative method of raking in huge profits with little stress and not a lot of time ‘working’ in front of the screen. If you have the patience,  perseverence and a large amount of capital then trend trading could be for you.

Trading the Trend in a Nutshell

You may or may not have heard of trend trading or trend following, the description is pretty self explanatory – you trade in the direction that a security is trending until it stops trending in that direction. It’s long term, requires a sizeable chunk of capital and typically has a low win ratio. Some of the greatest trend traders report win ratios of about 2 to 3 out of every 10 trades, with the winning trades bringing in such huge profits that the losers don’t matter as long as sound position sizing and money management is employed. With losses of no more than 2% and winners ranging from 10%-20% sometimes even more you can do the math and see if it’s worthwhile or not.

Trading the trend is what people mean when they say “cut your losses short and let your winners run”

Is Trend Trading “Dead”?

Over the years this method of trading has come under a lot of flack. People even like to dismiss it as being ‘dead’. Not being someone who likes to get into arguements with others about who’s view of the world is “right” or “wrong” I will just assert my own personal belief that as long as there are trends there will be people who trade them successfully. Are there still trends in the markets and will there continue to be? You can look for yourself at some charts and form your own opinion on that.

How Does Trading the Trend Work?

Trend trading is pretty simple, it’s almost too simple for some people which is why they can’t do it. Typically you’ll have a system that identifies when a security has broken out of a range. When you get your buy or sell signal you enter with a stop loss that conforms to your position sizing or money management strategy. If it takes off in your direction then you stay with it, and if it stops you out well it stops you out and you wait for the next signal. Depending on your timescale (trend traders typically use longer timescales like daily weekly and monthly charts) You will want to set a wide stop loss so you can weather the large swings that will happen as price rarely moves in a straight line.

As price moves further in your direction you can trail your stop loss to reduce then remove your risk and then lock in profits along the way – provided you haven’t been stopped out by any retracements. You continue to hold and trail your stop until eventually you are stopped out when the trend reverses or falls into a range.

If you are agressive you can also add new positions along the way at certain milestones. How and when you do this will vary with whatever system you choose, some people like to manage this based on fixed amounts of profit locked in (e.g. initial risk is 2%, at 4% profit move the stop to lock in +2% and add another position risking another 2% then repeat every 4%), some people like to move their stops behind support and resistance levels as they are cleared.

Either way, if you’re going to trade like this it’s essential that you have a pre-defined plan for the trade and stick to it. Take this example I just knocked up in MS Paint, you can see the entry and possible points (numbered) to move your stop and add positions as price trends up:

Planning and Trading with the Trend – A Real Life Example

Before I go on I would like to be very clear that the following is by no means a trade recommendation of any sort. This is purely an example of I chart that I am watching and *if* it takes off on a new trend direction how I anticipate to trade it.

AUD/USD. The Australian dollar has enjoyed a pretty nice multi year rally which looks like it *could* be reversing. Why? Because I see the popular head-and-shoulders reversal pattern on both the daily and weekly charts. The formation of the right shoulder indicates that it is no longer making higher highs and higher lows therefor a trend reversal could be on the cards – OR – it could just establish a range for a while – OR – it could pause for a bit, consolidate then continue opward.

Either way, if I do decide to take it the worst case scenario is that I get stopped out for 2% of my account and move on to the next one. Here’s the head and shoulders pattern which as you can see is still yet to even reach the neck line let alone breach it downward:

One thing I like to do on a chart that I’m watching closely is to draw support/resistance ‘pivot’ lines to get an idea of the areas that price has reacted to on it’s journey to where it is now. This will help me plan out how I would trade a downtrend on AUD/USD if it materialises (click on Thumbnail for full size image):

And just to validate the lines I’ve drawn blue boxes on the areas that I can see have caused price to react as both support and resistance (click on Thumbnail for full size image):

So… if this breaks to the downside and starts a new trend I have a clear idea of where I will trail my stop and add new positions. All I have to do next is wait and watch then execute as and when. Worst case scenario I’m down 2%. Pretty simple huh?

Confluence

One more thing I’d like to talk about is confluence. Confluence is when 2 or more levels line up with each other, they can be previous pivot lines, psychological round numbers, popular moving averages, trend lines, Fibonacci retracements or extensions, fundamental levels and more. When you get 2 or more of these in the same place then these levels can be great to trade off and horrible to trade into.

When I draw a Fibonacci retracement on the weekly AUD/USD chart  I not only get more areas on the chart to plan my long term trend trade around but 3 levels where pretty solid pivot lines line up with Fibonnaci levels. These could cause serious problems if price gets to them. They are the long horizontal areas highlighted in blue. If price get’s to these levels what do you think might happen (click on Thumbnail for full size image)?

Always good to be prepared and have a map of the road ahead, especially when trading the trend