Trend Trading Tutorial for Beginners.
If you have done any sort of research into trading, you will be sure to have come across such idioms as “the trend is your friend” and have probably read about the variety of advantages there are to trend trading.
How do we take this theory and apply it in a practical sense, though?
Trend trading can be sub divided down into a few sections.
1 - Trend definition.
2 - Key market levels definition.
3 - Entry criteria.
4 - Exit criteria.
This is the easiest but one of the most important parts. A trend should be an obvious slant from high to low, or vice versa from the left to right of a chart. When zoomed out, to have a broad context, we are looking for “corner to corner” moves, in this example of an uptrend, we can clearly see the price starting in the lower left corner and progressing up towards the top right corner.
Indicators such as moving averages can be used to help to understand the direction and strength of a trend, similarly, we are looking for a clear slant of the direction of the MA and when the price is trading over important moving averages (we are using the 200 SMA here) this is an indication that the current trend is strong.
Average Directional Movement Index (ADX) is also a very useful indicator to help to tell you if there is a trend present. ADX showing anything over 30 tends to indicate there are trending conditions at that time. Please note, ADX does not give any hint towards direction of a trend, unlike indicators such as RSI, where low readings and high readings can give indications on the potential future direction of price, the ADX will show a high reading if there is a trend and a low reading if there is not, whether the trend is up or down (google “ADX Investopedia” to learn more about this).
Attention should always be paid to the prevailing trend on a timeframe higher than the one you usually trade on, this will help you to keep an understanding of the bigger picture.
Key Market Levels Definition
AKA as “support and resistance levels”, this part of planning trend trades is breaking up the market into important zones. This helps you to get an idea of places you may want to enter and exit the market and it also helps to filter out all the noise, by adding structure to the charts.
Identifying support and resistance zones, by eye, comes down to two main things.
1 - Look for the very obvious highs and lows, the places the market makes bounces from must be important, for one reason or another.
2 - Looking for the prices where the market touches multiple times and has short term bounces from.
Identifying the main support and resistance zones is something most new traders wonder about how to do, the important thing to remember is support and resistance levels are areas that participants in the market think look important, if it not obvious to you it is an important area, it is probably not obvious to anyone else, and vice versa. So a lot of it comes down to common sense, where are the levels price reacts the most to?
This is where you start to get specific about things. Up to now, you have been establishing the overall direction of the market and roughly the most important areas, based on what price has done in the past.
Now you are looking to establish when and why you will enter the market if it meets this important level.
The most simple method is just set a pending order that will automatically open a trade if price touches the level you have set it on, this is very simple and low maintenance way of engaging the markets but not always the most efficient.
The second option is to have a set of conditions you are looking for when price meets that area. In this scenario, you set some sort of alert, so you are made aware when the price is trading in your area of interest and then you have certain things you are looking for in order for you to enter the market. Options for this include reversal patterns in the price action candles, indicators such as RSI showing the market to be oversold in an uptrend or overbought in a up trend and for signs the level will hold before entering into retests of it. You have a tick list of things you want to see happen at that area and if you see them, you enter the trade.
Every trade is made up of two parts, an entry and an exit. As with the entry, you should have a plan before you enter the trade as to what you will do, whatever price does. If price goes against you, you will have a point, or conditions, at which you exit the trade by cutting the loss (known as the “stop loss”) and if price goes in your favor, you have a point, or conditions upon which you will bank your profits.
When it comes to stop losses, this is another exercise in identifying the important support and resistance levels. You want to identify the areas where the market has the possibility of reversing, based on previous times the market has met that area and placing your stop loss just a little bit behind that area. Your bet is essentially that the price will turn around and move again in the direction of the trend when it meets an important support/resistance level and by placing your stop loss behind that level you are stopping you loss when you have been proven wrong on this premise. Take a step back and replan. Is the trend still valid? Where is the next support or resistance level?
When it comes to taking profits, you can also use the same tactic of identifying the next main support or resistance level price would meet if it moved favorably for your trade and set the “take profit” to automatically close the trade and bank the profits at that level. You also can have certain criteria or conditions where you will close the trade at a profit not pre determined. An example of this may be looking for moving average crossovers showing a shift in momentum against your trade or by trailing your stop losses up progressively as price moves in your favor to lock in profits. To do this, you are best to get an understanding of how a trend structure forms, so you know the levels to be trailing your stop losses. One of the best ways to do this is getting an understanding of Elliott Wave theory, paying particular attention to how to see the difference between a short term consolidation vrs a larger correction and being able to spot the end of “ABC” corrections to get an idea of when the next trend burst should be starting, you want to trail stops up under the ABC high/lows since if these areas break, the short term trend may no longer be valid and there is a stronger chance of your running profits decreasing.
I will post running updates on real market/real time examples to help people learn the mechanics of how all this goes together in practice, so follow along with this thread. If you have any inputs or questions, you are welcome to post them here on the thread or contact me privately.