[tradingadvantagetm]

How often have you looked at a chart and tried to determine whether or not the market is really trending? How many times have you been fooled by your Stochastics or RSI indicators? How many times have you sold because your oscillators were screaming overbought then watched the market dip a little and then continue higher, stopping you out for another loss? One of the most important things you are probably trying to figure out with any given market is if it is in a trend, and in which direction that trend is moving.

Find the trend and make friends with it

Swimming upstream is difficult, and that kind of battle is probably why you’ll often hear traders say, “The trend is your friend.” But spotting a real trend can be tricky, especially for first time traders and chart observers. You don’t need really fancy calculations or trading software to spot a trend in a market, and if you find it, don’t fight it.

Guess who bought the dip? That's right, the floor traders and the other professionals

If a market is really trending, there will always be reactions against the prevailing trend. Those are the signals most floor traders love. They know that many investors in the general public will fall for the "fade" nearly every time. So how do you know whether or not what you are seeing is a real trending market or not?
The basics are very simple. A market in an uptrend will likely have higher highs and higher lows. The opposite is true for a downtrend. Lower highs and lower lows tell you when the market is in a downtrend.

You never want to go against these situations.

IMPORTANT TRADING RULES:

1) We never get long or buy in a downtrending market.
2) We never sell or go short in an uptrending market.

It's just like stepping in front of a freight train.

A market on a move higher will attract new buyers and selling forces will help establish higher highs. When the price dips, more buyers will come in on what they perceive as a value entry point, delivering those higher lows. On the downside, selling pressure will cause lower lows and any move above those results in more sales, topping off those lower highs.

Find support and resistance and find trading opportunities

Once you have determined the overall trend, you can look for support and resistance points. Knowing these price levels can help you follow the trend, buying on dips in a market that might be trending higher or selling on pops when the prevailing trend is likely lower. It doesn't get any better than that!

Best trades to you,

Larry Levin

[method]

So....how to determine when the market is really trending?

[chulaihuey]

The way I read it:
"A market in an uptrend will likely have higher highs and higher lows. The opposite is true for a downtrend. Lower highs and lower lows tell you when the market is in a downtrend."

[chulaihuey]

My question is what the following sentence really means: "They know that many investors in the general public will fall for the "fade" nearly every time."
So does "falling for the fade" mean that in an uptrend if there is a pullback the general public is taking this to be a trend reversal, and entering short while the smart money "knows" this is just a pullback and they are going long on the pullback's low. So the smart money is buying from the gen pops short selling.
Do I have this right? Or am I all wet???
If I do have this right what are the signals then that this is a pullback to the prevailing trend as opposed to a true trend reversal?

[Tradewinds]

What does 'Trending' mean? If up trending means one higher high, then the trader needs to wait until the next higher high to believe that an uptrend has started. The next higher high means that there have been two highs. So I've already missed both those highs.

If the downtrend has not ended until the uptrend has started, then do I need to wait to exit the short until the next higher high? How do you trade that situation? If I wait to exit the short until the next higher high, in a lot of situations, I could be back to breakeven or even at a loss. That doesn't make any sense to me.

Explaining market behavior in terms of 'Trends' can be extremely misleading. What a trend is could mean different things to different people. And even if there was a consensus about what the definition of a trend is, it's still all meaningless unless the trader understands what usually makes price do what it does. There needs to be a positive correlation between what price does and some underlying reason. For example, price doesn't do anything because the close just crossed an MA line. Maybe if enough people THINK that price SHOULD do something because the close crossed an MA line, then something will happen. But that is because of human behavior, not the trend line. Trend lines don't make the price do anything. My point is, that we all get caught up in thinking that price is going to do something for reasons that have absolutely nothing to do with why the price is really doing what it's doing.

It's meaningless to come up with trading rules unless a trader has some knowledge about what makes the price do what it does. Unless I read about the reasons for price doing what it does, and it is then proved to me, then there is no point learning the strategy rules. Why learn strategy rules and have no idea what the rules are based on?

It's absolutely meaningless to talk about trends unless there is a specific definition for what a trend is. And then the strategy rules need to fit the trend definition.

If a definition of a trend is that the price is going in one direction for "quite a while", then by the time you identify it as a trend, then "quite a while" has already gone by. It's a "Catch 22" situation. By the time the price has met that definition of a trend, it could be ready to start moving the other direction. So depending upon a trader's definition of a trend, and what the rules are to the strategy, you could always be late to enter.

[SIUYA]

if you are trend trading you will need your own definition for what constitutes a trend and this is needed for your systems entry and exits.....but you dont necessarily need to know why it is trending.
Having a philosophy/theory of the way the markets work in terms of overall structure is important to understand how you intend to capture profits from the markets, however the in depth analysis of these people are buying here, those people are selling here for these or those reasons is largely irrelevant....just like magical trend lines. The market does not care why people are doing things, it merely reports that they are being done.

If you really think you can track why people are doing things as opposed to how market patterns seem to repeat and continue and how you can put the probability of those patterns repeating in your favour then become an economist.
If you choose trend following then it is simple - you think the market will continue in the same direction you think it is trending in....the rest becomes money management. Worrying about missing the first two higher highs is missing the point if you think those higher highs will continue.

The markets are always trending - it depends on YOUR time frame.

[PiP.Squeak]

Originally Posted by SIUYA »

The markets are always trending - it depends on YOUR time frame.

This is exactly right and what I refer to as fundamental truth. I believe good trading strategies are built on fundamental truths because, when things go bad, and they always seem to sooner or later, fundamental truths are always still the same. It seems like when you base a strategy on fundamental truths you gain confidence.

In my mind the most important part is not just being able to determine if the market is really trending by identifying higher highs or lower lows, but being able to identify the trend early on rather than after the fact.

I've found that almost always a trend can be can be identified on the smaller time frame first using the same method of identifying higher highs or lower lows. Then I draw a hard trend line across the bottom/support of an up trend or the top/resistance of a down trend. In order to do this there has to be at least two retracements.

Then I wait for it to come back one more time and retest my trend line. If it holds then I take the trade. From there on its about stop loss management. I try to do that on the larger time frame moving to just below or above my trend line as the trend develops.

I seems like if I try to wait until the trend is clearly recognizable on the larger time frame most of it has already passed me by.

I also try and get a feel for why the market is moving. For example; If Italy just announced that they may default on their debt there's a pretty good chance we're going to trend until the end of the day!

It also seems like we have longer faster moving candles in the direction of the trend and short slow moving candles in the retracement.

That's what seems to work for me, but I'd love to hear what others do to identify a trend early on.

[bobcollett]

Originally Posted by Tradewinds »

What does 'Trending' mean? If up trending means one higher high, then the trader needs to wait until the next higher high to believe that an uptrend has started. The next higher high means that there have been two highs. So I've already missed both those highs.

If the downtrend has not ended until the uptrend has started, then do I need to wait to exit the short until the next higher high? How do you trade that situation? If I wait to exit the short until the next higher high, in a lot of situations, I could be back to breakeven or even at a loss. That doesn't make any sense to me.

Explaining market behavior in terms of 'Trends' can be extremely misleading. What a trend is could mean different things to different people. And even if there was a consensus about what the definition of a trend is, it's still all meaningless unless the trader understands what usually makes price do what it does. There needs to be a positive correlation between what price does and some underlying reason. For example, price doesn't do anything because the close just crossed an MA line. Maybe if enough people THINK that price SHOULD do something because the close crossed an MA line, then something will happen. But that is because of human behavior, not the trend line. Trend lines don't make the price do anything. My point is, that we all get caught up in thinking that price is going to do something for reasons that have absolutely nothing to do with why the price is really doing what it's doing.

It's meaningless to come up with trading rules unless a trader has some knowledge about what makes the price do what it does. Unless I read about the reasons for price doing what it does, and it is then proved to me, then there is no point learning the strategy rules. Why learn strategy rules and have no idea what the rules are based on?

It's absolutely meaningless to talk about trends unless there is a specific definition for what a trend is. And then the strategy rules need to fit the trend definition.

If a definition of a trend is that the price is going in one direction for "quite a while", then by the time you identify it as a trend, then "quite a while" has already gone by. It's a "Catch 22" situation. By the time the price has met that definition of a trend, it could be ready to start moving the other direction. So depending upon a trader's definition of a trend, and what the rules are to the strategy, you could always be late to enter.

Hi Tradewind
A thought provoking post
So if you dont enter after the second higher high, when are you going to enter?

regards
bobc