There is a famous saying in Wall Street which goes like this "The Trend Is Your Friend Till It Ends". While this maxim is known by many traders old and new it is seldom practiced. How on earth is the fact that everyone mentions about the trend but not many actually practice what they preach? In my own trading, I have found that I made the most money through trend trading. The most consistent and reliable way to rake in profits day in day out is to find a stock that is beginning a trend and ride it higher.
Although I trade reversals, in reality I am actually trading a new trend in the smaller time frames. For example, I may trade a stock that is oversold in the daily charts. But when we zoom into the 60 min timeframe and the 15 min timeframe, I am actually trading the beginning of a new uptrend in these time frames.
There are 3 kinds of trend that will happen to a stock. They are:
The trend trader only focuses on the uptrend and the downtrend. When a stock is trading sideways, it goes nowhere and the trader will lose time and opportunity cost. A trader plays the uptrend by buying the stock as it begins an uptrend. As the stock moves higher, the trend trader picks specific entry points and add to their position.
On the other hand, a trend trader will short a stock if they suspect the stock is about to start a new downtrend. As the stock moves down, the trend trader will find specific entry points to add to the short position.
If you are new and want to know more about what is an uptrend or downtrend, you might want to read The 3 Different Trends Of The Stock Market.
Have you ever seen a stock that makes a new high and you think it could not go any higher? The stock was trading at $25 in February. By March it goes to $35. Everyone thinks that the price of the stock is too high. In June the stock was trading at $45. In August the stock has already shot up to $60. By May of next year, the stock has gone all the way to $140. An almost 600% gain in a little over a year!
Those who say that the stock is too expensive at $35 are now scratching their heads and wondering how on earth the stock could go up to $140. This is a true story by the way and the stock that made the amazing run is non other than NVidia.
The reason why the stock continued to trend higher is because of the principle of a "trend in motion tends to stay in motion". A stock that is trending up in the weekly and daily charts will tend to continue to go higher. There is of course many fundamental reasons that this stock moved up. The fundamental analyst will always come up with some brilliant reason why the stock is a winner. Trend traders just follow the trend.
Sometimes even before the fundamentals change, the stock has already started to trend up. Somewhere a few months after the initial trend begin, there will be reports of increase earnings or growth. The lesson here is that there are people who know a lot more than the public. They may be insiders or industry stalwarts who know the signs and times of an industry and company. And they buy the stock months before the good fundamental news come out.
If you think you know a lot about a company, there will always be some insiders who know even more than you. Which is why, its always good to look at the trend of the stock.
This next fact may seem like a repeat of the first one. But the important difference is that the first one is about "continuation" while this fact is about the "length". Some stocks really do have "Big Trends". And when we say big trends we mean looking at the weekly charts and monthly charts and on the whole, the stock is moving up through the years.
There may be some corrections here and there but the longer term trend is up up and away. Even the S&P 500 Index has a big trend that have lasted for decades. The direction of S&P 500's trend is and have always been up. Which is why we should follow Warren Buffett's advice and just buy an index fund or ETF like the SPY and QQQ. How To Choose The Best Index Funds To Invest In
The charts above shows some unbelievable long term trends in the index and stocks that have baffled investors all over the world. What was once $25 is now $1000! Still people do not believe in the power of trends and they still prefer to bottom fish rather than ride a stock in an uptrend higher. Trend followers will have captured the meat of the move and found many opportunities to enter. The bottom fishers are still stuck with their stock at the bottom while stocks that are at $25 10 years ago are now worth $150.
Trends can last for a long time indeed.
The next time you look at your portfolio, look at the stock that gives you the most profits. Odds are the stock that made you rich is the one that is in a weekly uptrend or daily uptrend. That's why trend trading is more beneficial than any other strategy.
I have look at many many different stocks around the world. One thing that I noticed is that stocks tend to move the same way in London, as in New York or in Kuala Lumpur or Hong Kong. That's because stocks are traded by human beings and human beings are controlled by 2 main emotions. The emotion of "greed" and the emotion of "fear". These 2 emotions are reflected very well in stock charts. The two main emotions helps to create what I called the 4 stages of the market. You can read more about it at The 4 Stock Market Stages Every Stock Will Go Through.
Lets take a look at some stock charts from different countries.
If you are a trend follower, you get to have the opportunity to trade stocks all over the world that forms the same kind of pattern. As long as the stock is in an uptrend, it does not matter whether the stock is a US stock, Hong Kong stock or a Malaysian stock. The same trading principles still apply. You ride the uptrend and find spots to enter.
A chartist can look at a chart for 10 seconds and decide whether they want to play the stock or not. On the other hand, a fundamental analyst will need to dig into each stock's financial information, read news, read stories, read AGM reports or earnings conference calls to see whether the stock fits their criterias or not. All these take time, so a fundamental analyst needs to specialize and keep to a dozen companies.
A trend follower only needs to look at whether the stock is trending up or trending down. If the stock is trending up, then he or she will look at some fundamentals and decide whether to trade the stock or not. Longer term investors can look at the weekly charts and see if their stocks is trending up in the long term charts.
That is why I can go through 1000 charts a day in less than 30 min if I want. Sometimes I help people analyze stocks and read the charts and all it takes is just 30 seconds for me to know whether the stock is good or not. When I write it down and annotate the charts, it takes me 2-3 min to produce an annotated chart.
I remember reading John Murphy's book (he is the founder of stockcharts.com) and he compared the approach of TA and FA. Both the technical analyst and fundamental analyst came up with the same price target. But the technical analyst did it in a fraction of the time the fundamental analyst needed to come up with the price target.
Don't get me wrong.
I'm not advocating that everyone should abandon fundamental analysis. However, I think that using technical analysis and looking for trends will safe a lot of time to sift through thousands of stocks. With the available free time, one can also venture into the stocks of other countries like Asia, Middle East, Europe and even South America to find investing opportunities.
When you combine the power of trend following and fundamental analysis, your odds of coming up with a big winner is improved dramatically.
All financial instruments will trend from one time to another. When you look at their charts they are either moving sideways doing nothing or in a nice uptrend or downtrend. I read somewhere that stocks tend to trend 33% of the time. So when stocks are not trending, you might be sitting there doing nothing for the other 66% of the time.
There are many financial assets and instruments in the world which are in a bull market at one time or another. The many financial instruments available to investors include:
These asset classes will always have a bull market (uptrend) or bear market (downtrend). Once you identify the trend, you can actually use the same principles of trend following and trade or invest in them. With the popularization of ETFs, Eminis and CFD, you can actually trade almost anything around the world using a trend following approach. The barrier to entry is very low today and what is used to be the domain of professionals are now available to the public at a fraction of what it costs 10 years ago.
You see, there is not much difference between stocks, bonds or commodities or whatever that is available to trade. As long as there is a human behind the trading desk playing with these things, the two dominant emotions of greed and fear will rule. There will be a time when the asset class is trending up or trending down. When it is trending up, you buy it. When it is trending down, you stay away or short it. Simple as that. Try not to make things complicated.
One of the secrets of being successful in the markets is to specialize. Specialization allows you to know an index, stock or commodity so well that it eventually gives you an edge in the market. I've heard that the average NYSE specialist makes an average of 170% return a year.
For my part, I specialize in Nasdaq 100 stocks. I know the index well. I know the stocks in the index well and there are some stocks that I know like the back of my hand. Apple and the FANGs are stocks in the Nasdaq 100 that I know better than others. There are some traders who only trade Apple, Netflix, Facebook and some other tech stocks and if you were to trade against them in these stocks, you are really asking for trouble.
The question is if a trader only focus in the FANGs and Apple, is there enough opportunity to trade these stocks? Well, if you only focus on one time frame the answer is definitely no. A stock may have a nice daily uptrend and then suddenly trade sideways for 3 months. If you only focus on the daily charts you will be out of job for 3 months on that stock.
The good thing about trends is that they appear in all time frames. Trends can appear in:
I don't think anyone would want to trade off the yearly charts. But many traders will find opportunities from the weekly to 5 min charts. Some stocks like Apple allow you trade off the 1 min chart if you really wanted to. The smaller the time frame the more liquidity is needed. The good thing about Nasdaq 100 stocks is the majority of them have ample liquidity for traders to perform wonders in smaller time frames.
I showed only the 15 min chart, 1 min chart and hourly chart examples above. Won't be showing the daily and weekly as we have ample examples. I think you get the idea. With enough liquidity, you can actually do trend following in any time frame. Even if you specialize in only 10 stocks, with multiple time frames, you have more opportunity than you can imagine.
I am a big believer of trend following. I think it is dynamic, versatile and flexible. The beauty of trend trading is you can long or short the stock. Most stock investors will not short a stock. But forex players are no strangers to long or short. They can make money both ways. Index players can also long or short the index. So, even if the market crashes, its a bull market for futures/CFD/emini players.
Shorting seems risky to the general public. That's because a stock can rise and rise forever, like Amazon. Those who shorted at $25 will be sitting at a huge loss when it is trading at $995 now. But I don't think anyone will be crazy enough to not put a stop loss. The big risk is when there is good news in the stock like a surprise earnings or a takeover offer which sends the stock higher above the stop loss point. Or in forex, an announcement by some central bank or politician or Feds will sometimes send a currency pair shooting higher or lower.
In investing or trading there is always a risk. Anyway, there is no big risk if the trader has proper money management and position sizing. People who lose a lot of money are usually not those who are wrong about the direction. They are usually people who use too much leverage. Who says someone who only long stocks won't blow up their account? A trader or investor who only long stocks is not immune to blowing up their accounts. I think most of the blow up stories that I have come across are from people who long stocks not short them. I wonder why.
One of the things that separate an excellent trader and a bad trader is his or her ability to choose stocks that are in a strong trend. The gambler will chase after any stock they hear that might go up. The bad trader will look at any bullish pattern and buy it.
The good trader on the other hand will look at the
Depending on what time frame the trader trades, he or she will make sure the higher time frame is in an uptrend. I have found that the best trades for my trading are usually when an index is in a nice 60 min uptrend and nice 15 min uptrend.
Recently, the Nasdaq 100 Futures had a quick crash downwards. But it formed a 60 min double bottom at daily support and eventually broke a downtrendline and started a new 60 min uptrend. A nice 60 min uptrend started when there was a bullish 20 cross 50 MA and subsequently the index stayed above the rising 60 min 20 MA and 50 MA. During this period, it was a great time to long tech stocks.
Looking at the chart above, the Nasdaq 100 Futures is still in a nice 60 min uptrend and very likely to move higher. Therefore, the focus for traders should be long. We will never be able to catch 100% of the trend. What I usually do is to look for boxes of support and check whether the index is still above its rising 60 min 20 and 50 MA. That way, we can catch at least 70% of the move.
To learn more about how to utilize the 60 min charts to improve your trading results, read A Simple Market Timing Strategy That Works!
The chart above shows the 15 min chart of ADBE which is a component stock of Nasdaq 100 index. When the index was starting a nice 60 min uptrend, it was a clue to traders to look for buy setups in Nasdaq 100 stocks. ADBE formed a nice 15 min uptrend which provided many trading opportunities to trend traders. With a bullish 60 min uptrend in the Nasdaq 100, it was easy for ADBE to rise.
The stock had a nice 5 days run up and eventually drop below its rising 15 min 20 MA and 50 MA. That told short term trend traders to take profits off the table. We can always find another stock in the Nasdaq 100 to ride the trend or we can wait for another setup in ADBE.
Want to learn a simple trend following strategy?
To me, trend trading or trend following is still the best trading strategy out there. Maybe you will think differently. But I just want you to ask yourself this question the next time you look at your portfolio. Where did the majority of your profits come from? Is it from a stock that is in an uptrend or from a stock that stayed stagnant? Then come back here, press the like button below and shoot some comments in the box below.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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