Trade trends profitably

Part 1: Clever timing with different time levels

 

Building on the basis of the basic article “Smart traders track” (TRA-DERS’ 04/2017; available in the shop at www.traders-media.de), we introduce a strategy to you in this article that will help you combine obvious trend figures with each other in a clever way. This makes a profitable trading setup.

Whoever wants to trade successfully, should know the individual components (see infobox) as well as the behavior of the individual market players. These leave behind tracks within the chart with their purchases and sells. We want to trade confluent trend figures within a time unit and therefore need to look at the courses of the trends within a time unit. It’s therefor necessary to figure out:

· in which place trades are being continued respectively finished and where trend traders get active with orders

· at what point the movement is finished and when correction traders start with the buildup of positions

· at what price level the correction trend breaks and when the (movement) trade in the direction of the superior trend can be started again

 

Trend sizes within a time unit

The presence of certain trend figures is essentially determined on the liquidity of the respective security. The higher this one is the more trend figures can emerge over the course of the price.

Additionally, the right combination of the different trend figures should get a lot of attention. Thereby, the respective bigger and therefore superior trend predetermines the trade direction, which is being traded into from the smaller, subordinate trend.

 

The risk of a failed trend

Trading signals on the basis of the coalescence of different trend figures are working very well together if two directly coherent trend figures are combined with each other. The reasons for flawed signals are very often that a height is being skipped during the combinations of a trend figure. If you use the high trend, the middle trend represents the correction and movement arms. When the subordinate movement trend breaks the subordinate correction trend there is a high chance of a renewal of the superior trend. The subordinate trend can in some circumstances display trend shaped moving corrections and movements as well that are displayed via the small trend. If now, mistakenly, a combination from the big and the small trend is formed and the middle trend is being skipped, it can happen that the small trend goes into the direction of the big, while the middle trend is stuck in the correction process. If, in this situation, a trade is opened from the small into the big trend, you trade against the prevalent middle trend. This way you unnecessarily increase the risk of a failed trade. If, however, the reversal of demand already happened directly in the subordinate trend, reversing signals from the next lower time unit can serve the trade with follow up signals well.

 

When is a trend allowed to be traded?

You can earn the biggest return if you trade a trend with its emergence (young trend) and then stick with it for as long as this trend is not broken. As you can see in figure 1, the success of this setup depends on if the superior trend has already been broken. If a downswing is evident, that hasn’t already broken the previous trend; this trend solely depicts the subordinate correction of the superior trend. In order to make sure that you trade the superior trend, wait until the previous superior trend has been broken.

If you want to trade the movement of an upswing or to trade the trend with the reversal of demand out of a correction, also wait until the correction shaped subordinate downswing has been broken (reversed in a downswing). These are first signs of the reversal of demand that can help you to increase the probability of success of your trade.

 

 

The trading setup – Getting started with trading younger trends

A requirement for trading young trends is the chart situation that can be seen in figure 1 on the right, where the preceding upswing has been broken (T) by a correction (tumbling prices). The price is then in a trendless phase until a new trend is formed. Next, you’ll wait for a countermovement (rising prices). By applying this new correction phase, you now know the price that needs to be undercut for a trend formation. Now under this point you can put a stop sell (limit) order and thus exactly plan your entrance. In order to trade young upswings the named points apply in reverse order.

 

Access for the trade from correction

While trading from the correction you operate within an existing trend. That’s why you use the trends of the directly subordinate time unit for your trading – just as it is shown in figure 2. The goal for the trade from correction is a position opening with the occurrence of a demand reversal. As soon as the correction trend is broken you act analogously to the approach that has been explained in the previous paragraph. You basically do trend trading on the subordinate time unit.

 

Definition of goals

Since you want to trade the trend until it’s broken, the definition of a winning goal is being omitted. While trading the movement with instating reversal of demand, for example out of a deep correction, you can also set the current high in the superior upswing resp. in the current low of the downswing as your first goal. As an alternative you of course can also decide to trade the subordinate movement trend until its being broken.

 

Initial protection and stop follow

If your setup has the goal to trade the trend you should secure your position in the area – long per stop sell order, short per stop buy order – where the current trend has been broken. This would be above the last high in the upswing. The stop pull happens with the trend follow-up after the next correction on the then current low in the upswing, respectively the current high in the downswing. For trading the movement of the superior trend it is recommended to initially secure the trade where the movement trend will be broken. The stop pull, however, should however be regulated divergently from the previously discussed trend trade stop. Until you reach the current high in the superior upswing, respectively of the current low in the downswing, you let the trade breathe. You can achieve that for example by pulling the initial stop only on every other low point (long) respectively highpoint (short) of the movement trend. As soon as the goal in the superior trend is reached or overrun, you’ll pull your stop order on every following low resp. high of the moving trend.

 

Practical Example

The stock of Vonovia AG (ANN.DE) was in correction of a stable upswing from August 2016 until the beginning of January 2017. It found its highest point (P2) on the 15th of August 2016. The subordinate correction trend has been broken on the 2nd of January 2017 by a strong movement. This movement found its high point on the 6th of January 2017 at 31.75 euros due to an emerging correction and therefore represented the entrance point for the trade from correction of the superior trend. If this mark is being exceeded the movement trend is being created and the requirements for the trade from correction are fulfilled. As a driver of prices, the security orders of correction traders can serve on the high points of the correction trends. These visible points in the chart explain who buys after the position opening.

 

Our trade went off the following way:

· Position opening per stop buy order: 31,76 euros

· Initial stop: 29,70 euros

· Profit objective – Movement trade: 36,80 euros

· Trailing stop: Low points of the movement trends with respect to sufficient freedom for corrections.

With the execution of the stop buy order the entire trading setup has been activated. The profit objective is being set at the current high point of the superior upswing. The stop pull is being executed in the further trading process according to the set rules. If the movement trend is being broken before, the position is early finished by the set stop rules.

 

Conclusion

The trade of trends with the combination of different trend figures within a time unit has the big advantage that you can find all the necessary information within a chart. By setting the trend combination, you strategically decide what trend is the right one for your trade. This way you can concentrate on the basics: The search for young trends, respectively for the reversal of the demand within corrections of existing trends.

 

 

Author

 

 

 

 

 

 

Mike Seidl is a trained banker and has traded real money on the capital markets since the end of the 1990s. Since 2013, he has been managing his own assets on a professional level and is giving his knowledge through seminars and coaching sessions to help people who want to shape the way to achieving their financial goals independently. Info@investorschule.de

 

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