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Trading Tip 3 - Do You Follow The Trend?

One of the surefire ways to make a profit in the markets is to follow the trend.

And one of the surefire ways to lose money fast is to ignore the trend.

As the saying goes, "The Trend Is Your Friend".

75% Or More Of Your Losses Might Be From The Wrong Trend

I think its safe to say for most traders, losses are often the result of picking stocks in the wrong trend.

If you check your own statistics, 75% or even more of your losses are a results of buying stocks in the wrong trend.

  • You buy stocks that are in a downtrend

Why on earth would you do that?

But you keep repeating the same mistakes over and over again.

The 3 Types Of Trend

There are 3 types of trend. 

They are:

  1. Uptrend
  2. Downtrend
  3. Sideways trend

If you want to make money hoping the stock will go up...guess which trend you will choose?

Yes you are smart...

Uptrend of course.

Making money on the long side requires you to choose stocks that are in an uptrend.

Ignore the downtrend stocks and sideways trend stocks.

Downtrending stocks tend to go lower and a sideways trending stock might be trading sideways for a long time and waste your time and energy.

How To Be On The Right Trend?

The answer to this question is to have a filter.

You need to have a trend following tool that tells you when it is conducive to be in the market and when it is not conducive to be in the market.

There are many trend following tools but a good one would be the moving average.

Chart Courtesy Of TC 2000

Above is the 60 min chart of SPY.

The red line is the 60 min 20 period moving average.

The simple way to interpret this is:

  • It is conducive to be long when SPY is above the red line
  • It is not conducive to be long when SPY is below the red line

Simple isn't it?

That does not mean you should be long the moment SPY goes above the red line. You merely know that it is a good and conducive environment to long SPY.

Next you will look for a bullish trading strategy that appears when SPY is above the red line.

I find that it useful to keep traders from taking bad trades.

Filtering Bullish And Bearish Environments

Now that you know the trick, let us take a look at the charts below.

Chart Courtesy Of TC 2000

When Agilent Technologies was above the red line, it was conducive to long this stock. Notice how the stock was in an uptrend as well.

Chart Courtesy Of TC 2000

How about Advance Auto Parts chart above?

When it was below the red line, do you want to buy this stock?

Of course not, notice how it went down and down. But it would be good to short the stock though.

So there you have it.

The next time you buy a stock, follow the trend!

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