Monday, August 15, 2011

Follow the Trend

Profitable trades are often made in the direction of the trend. The obvious question is: how does the trader define the trend?

Traders should realize that the definition of trend is subjective. There is no mathematical formula to identify the trend. If there were such a formula, every trader would reach the same result, there would be only one view of the trend, and, no one would take the other side of a trade.

The trader, then, needs to find his view of the trend.

How do you look at charts?

If you look mainly at raw price charts without any indicators, then the up trend is probably a series of higher highs / higher lows and opposite for down trend.

If you are focussed on moving averages, then the trend should be defined with the moving average.  Newer ways, such as zero lag averages should be considered.

If indicators is what you like, then look at the MACD, CCI with a longer term lookback (say 55 instead of the default 20), or experiment with an oscillator which has a look back of half the cycle period (cycle periods will be determined with tools such as FFT).

The actual tool you use is your choice. Difference between various tools is not much. What is important is consistency.Once you decide on a method to evaluate the trend, stay with it for some time. Do not switch quickly.

1 comment:

daytrader said...

Dear sir,

how would u trade a opening black marubozu , as on 12/08 black opening marubozu is visible, i googled and found that its a bearish sign and the reverse is bulish , also opening marubozu is not as strong as clsoing marubozu,if u clarify from ur experience will b useful 4 beginers

thanks and regards
ur follower