An Introduction to Trading with All an Trend
Trades can be made at direction of a fashion, or counter to the tendency.
Trading using the Trend
Trades can either be manufactured at the path of a fad or counter to the fad. While countertrend, or mean reversion, trading might be very profitable it generally takes more experience.
If you’re new to trading, then you also are able to look in trading at direction of this tendency as a kick off place. There are just two causes of it. Primarily, amounts have a tendency to proceed decisively once they’re trending. If you give attention to trading with the fad, you’ll likely be trading with the dominant marketplace management.
Second, trading with the tendency could be forgiving because you will find much more probable that the cost will soon proceed from direction of one’s trade, even though your time isn’t perfect.
This tutorial will introduce two very simple strategies to help you trade in the direction of the trend.
Trading retracements using two moving averages
This is one of the simplest strategies around. All that’s required is two moving averages and an RSI. The chart underneath is a 4-hour candlestick chart of the GBP/USD currency pair with a 15 and 30-period moving average. The RSI is plotted underneath the cost chart.
The method is very straightforward. For long trades, wait for the shorter moving average to cross above the longer moving average. Both averages should be heading higher and the cost should be above the short moving average. Now wait until the cost falls underneath the short average but stays above the longer average. This is the setup. Before entering wait for the cost to cross back above the shorter average and close above it. Finally check that the RSI is above 50 and then enter a long position. You can hold the position until the cost closes underneath the longer moving average, or you can exit if the cost reaches an obvious resistance level like a previous high.
For short positions do the exact opposite and remember to check that the RSI is underneath 50 before entering a position. This method can be used on any time frame and in any marketplace – but if you are day trading make sure there is enough time left in the day for the trend to go on. You can also use different combinations of moving averages if you find they fit the cost action.
Trading with tests of the trendline
To trade this method, you will need to before all else wait for a clear trend to develop.
For an uptrend you’ll want to see partially two higher highs and two higher lows. For a downtrend, you’re looking for partially two lower highs and lower lows.
Once you have identified the beginning of a trend you can draw a trendline. For uptrends it must touch the bottom of the two lows – this line will potentially act as support. For a downtrend, it will touch the top of the two highs and act as resistance. As a trend develops the cost will often test and then either reject or break the trendline. This method aims to trade when a trendline is tested and rejected.
The chart underneath is again a 4-hour chart of the GBP/USD pair with a trendline touching the before all else two highs. The inset is a 60-minute chart. The trend is down, so in this case, you would be looking for a short trade.
Once you have the trendline in place, wait for the cost to move back towards it. Once it begins to do so you can zoom into a lower timeframe of 20-30% of the original timeframe. Now look for the cost to touch or come very close to the trendline and then move away sharply. Ideally it should reverse with a candle that’s bigger than the candles before it. Wait for the next candle to open and if it continues moving in the similarly direction you can enter a short position.
Your stop loss is the highest high of the last few candles and you can hold the short position until the cost closes above the trendline. For long positions, you will be looking for a bullish reversal off the trendline and hold the trade until the cost closes underneath the trendline.
These are just two of many strategies you can use to trade in the direction of a trend. Losses will generally be small, and you will have the momentum of the trend behind you, making for good risk reward ratios. It’s important to only take clear, unambiguous setups when the marketplace is decisively trending. If the marketplace is choppy, be patient – a better trade will come along.