Trade trends profitably: Part 2
Part 2: How time levels flow together
Building on the basis of the basic article “Smart traders track” (TRA-DERS’ 04/2017; available in the shop at www.traders-media.de), you learned in the first part of this strategy series (TRADERS’ 05/2017), how to find useful trading possibilities within a time unit by combining different trend sizes. In this part we talk about how you find lucrative trading signals by combining time units while trading trends in a clever way.
When it comes to the trading of trends it basically involves two things. Either, you trade the trend directly with its emergence and you stay with it until it’s broken. Or you jump on an already existing trend and open your positions in its course respectively get your profit from the trade of the single trend components.
In case you cannot be part of it from the beginning and no sub-trend is obvious in the trend giving chart, you just take the trend progresses of the direct subordinate time units for help. Depending on the data provider or broker, you have a huge variety of possible time units available. They are usually in enough from the tick to the yearly chart.
The right trend size
The advantage of trading trends by combining time units is that you do not necessarily need to care about the trend size you’re trading. You can just use the currently obvious trend for trading. If you still decide for another trend size it is very important that you always combine the same trend sizes in the charts of the combined time units. If you do that you will avoid the mistake of skipping a trend size.
Combine time units the right way
When it comes to the work with time units, as a rule of thumb we can say:
The less time you have for the trade on the markets, the bigger the time unit that determines the trend direction should be chosen. Because the frequency of occurring signals is closely linked to the chosen time size.
First you determine the time unit that determines your trading direction – long for increasing trends or short for falling trends. In a second step you choose the time frame in which you will trade in the direction of the trend giving chart. Thereby you trade from the small time unit into the next bigger one. Please also pay attention to not skipping a time unit here. Because just as with the combination of trend sizes, it can happen that the directly subordinate time unit is still in the correction phase, when it comes to an interaction of time units, while the next smaller time unit just goes into the direction of the trend giving time unit. If you now operate from it in the direction of the trend giving time unit, then you trade against the correction trend of the directly subordinate time unit.
The trade from the third time unit (for example an hour) into the trend giving time (week) makes sense if the directly subordinate time (day) goes again into the direction of the trend giving time (week). In this case all three time units are congruent which is relevant for the trade of trends.
Movement and Correction in the Main Trend
Since no movement and correction trends can be seen in the trend progress of the trend-setting time unit, make use of the trend progresses in the direct subordinate time unit for trade in the trend of the superior time unit – as shown in figure 1.
The combination of similar trend sizes within different time units can lead to the formation of sub-trends within the subordinate time unit. That’s why a new movement resp. correction trend should only be traded if the previous trend in the subordinate time unit has been broken. The left side in figure 2 describes the practical way of dealing with such situations.
The trading setup
Access for the trade with trend emergence (young trends)
The requirement for trading young trends is that the previous trend has been broken by a correction (T). The price stands in a trendless phase until a new trend is formed. Next you wait for a countermovement. By using this new correction phase you now know the price that needs to be exceeded or undercut in order to form a trend. Now you can place a stop (limit) order over or under this point in order to exactly plan your access.
Position opening for the trade from correction
For the trade from correction of the superior time unit, you wait until the correction trend of the subordinate time unit is being broken. If this happens with a strong trendless price movement, you open your position with the formation of a new trend – figure 2 right side – in the direction of the superior time unit. If the correction trend is being broken due to an already existing countertrend, you open the trade according to the rules of the market technique by striding through the current point 2 (high point in the upswing, low point in the downswing) of the now available movement trend (PE). Your position openings will be done with the help of a stop limit buy order in the upswing. If you trade into a downswing you use a stop limit sell order in order to participate with an active position in the further trend progress.
Initial hedge and stop pull
Here you again act analogous to the experience in the described trend trade. For a trend trade strategy you secure your trade – log per stop sell order, short per stop buy order – in the area where the trend is being broken. The stop pull happens with the subsequent trend continuation on the newly valid point 3 (low point in the upswing, high point in the downswing).
In the movement trade of the trend of the superior time unit, it is recommended that you secure your position initially in the place where the movement trend is broken. You can put the stop pull in the movement trend trade analogously to the market technical regularities. In practice it showed to be helpful to leave the market more air until the current point 2 is reached with trades from deep corrections. You can achieve that by – as it is shown in figure 3 – “leaving some space” between your stop and the current point 3 in the movement trend. When the point 2 of the superior time unit is being reached resp. exceeded, you pull your stop order on all the following point 3 of the movement trend.
Definition of goals
If you want to trade the trend of the guiding time unit up to its end, then you work without a price goal. This way you will stick to it until your position ends with triggering the pulled security stop.
When it comes to the movement trade from a deep correction you can place the trading goal with the help of a limit order in the area of the current point 2 of the trend of the superior time unit. If your position allows it you can perform a partial-profit taking. The shares that are left in your portfolio can then be balanced with the break of the movement trend. To do that you have to let yourself stop by the market related delay of your hedge order.
Practical Examples
The Facebook stock (FB) was in an upswing since the 6th of January 2017 within a daily chart (figure 4 below). On the 22nd of February an outstandingly long green candle has been formed under high volume. Two correction days followed, of which the trends were apparent in the hourly chart (figure 4 on top). The downswing in the hourly chart was broken on 24. February 2017 by a trendless movement.
- Position opening with stop buy order at 135.70 USD
- Initial stop: 134.05 USD
- Trade goal: open
- Trailing Stop: Low points of the movement trend with due regard to of enough clearance for corrections below the current point 2 in the daily chart
The position was opened on 27.February 2017 with the emergence of the new movement trend at 135.70 USD from the hourly chart. It was the goal to trade the movement trend to a breaking point. This happened on 21.March 2017 after an increase of the price of 3.50 US at 139.20 USD.
Conclusion
With the trend trade in combination with time units, you don’t need to worry about which trend is the right one to trade. The trend progresses in the directly subordinate time unit show you when a reversal of the demand happens and therefore the main trend is resumed. This enables you to profit early from the start of a new movement.
Author
Mike Seidl is a trained banker and trades since the end of the 1990s on the capital markets. Since 2013 he maintains his own fortune full time and shares his knowledge with people, in seminars and coachings, who independently want to shape the path to their financial goals.
Article provided by Trader’s