Trend Based Trading
Trading Strategies I Professional Trading
The trend is the observable direction of the market – up, down, or sideways – and a person who acts in concert with the market trend can significantly increase their odds of success.
Learning Tip
The reason for this is that the trend of the market normally indicates the direction of most stocks and sectors. In fact, during a strong bull market, over 90% of stocks can be trending upward together, which means our odds of picking a winning stock are nine out of ten.
Understanding
Trend Analysis
Trend Analysis focuses on three timeframes – short-term (days to weeks), intermediate-term (weeks to months) or long-term (months to years).
These are broad definitions and can be shifted down into shorter timeframes (i.e. short-term could be hours to days), but it is important to always be aware of the trend in three consecutive timeframes because they are interrelated, and actions must consider all three.
The longer-term trend is the dominant and most important trend, but the shorter-term trends can be where long-term trend changes can first be detected. In other words, the longer-term trend determines the strategic stance, but the shorter-term is where tactical moves are made.
Steps to Apply
Trend Based System
To use trend-based system of trading in real life, you need to first of all select a stock, index or security trading chart and then apply this method on it.
The process involved identifying the three types of trends and trading accordingly. Use long term trend for direction and use short term trend to enter and exit trading positions.
For illustration, we have taken Asian paints trading chart.
Long Term Trend: We have used EMA (Exponential Moving Average) indicator in (1M) monthly timeframe chart to find long term trend. We have used 21 period EMA here.
As you can see the stock price of Asian paints was above the EMA line from 2009 to early 2023. It means, it was in uptrend during this period in long term.
Medium Term Trend: We have used EMA (Exponential Moving Average) indicator in (1W) weekly timeframe chart to find medium term trend. We have used 21 period EMA here.
The stock price of Asian paints was above the EMA line from May 2009 to early December 2011. It means, it was in uptrend during this period in medium term.
Short Term Trend: The short-term trend is used to do real trading. It is used to enter and exit your trading position.
We have used EMA (Exponential Moving Average) indicator in (1D) daily timeframe chart to find short term trend. You can also use (1H) hourly timeframe chart for this purpose. We have used 21 period EMA here.
The stock price of Asian paints was above the EMA line from late June till early January 2021. It means, it was in uptrend during this period in short term.
So, this is how you can apply trend analysis system for trading. Similarly, for short selling you can apply downside trend analysis for trading in bearish market also. Just look for price to be below EMA line in all time frames.
