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TimRacette

5 Methods for Identifying and Entering the Trend

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You've probably heard the saying “the trend is your friend until the end.”

 

In this post I outline techniques for identifying the trend, getting in, and staying in until it fails.

How do we Define a Trend?

 

An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows.

 

As an exercise, each night print out a 5 or 15-min chart of the market you are trading and identify the key highs and lows of the day. After a few weeks you will become better able to define the trend during the day.

 

Methods for Identifying the Trend

1. Moving Averages

20-ema.png

 

Regardless of the time frame you’re trading, moving averages are a great way to quickly identify the general trend of the market. I place more weight on larger time frames such as the daily and weekly and then look to trade with that trend on the smaller intraday time frames.

 

A 20-period Exponential Moving Average is a great tool for intraday trading.

 

2. Candlestick Patterns

 

As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment and trends. The candlestick pattern is made up of an open, close, high, and low price. These candlestick patterns have a lot more to say as compared to a bar chart. To get an even clearer picture of the trend try switching to a Heikin Ashi chart.

 

Methods for Entering the Trend

1. Fibonacci Retracements

 

Buying on a retracement as opposed to chasing the market is a great way to enter a trend. This reduces the likelihood that your stop will take you out. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long.

 

es-halfway-back.png

 

I outline specific rules for using Fibonacci retracements in my trading rules.

 

Entering a trade at a 50% Fibonacci retracement is a low risk method of getting into the trend. This allows you to enter on a pullback rather than chasing the market.

 

2. The NYSE Tick

 

This is by far my favorite tool for intraday trading. To learn more I will refer you to my prior post on the NYSE Tick.

 

3. Reversal Patterns

 

Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend is a great way to get in the new trend close to a reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio.

 

Whether you’re an intraday trader or use a weekly chart, being able to identify the trend, get in, and stay in will yield the greatest return over time.

 

If you'd like to read about my setups and how I trade the ES & 6E you can do so here.

 

Do you have other methods for identifying the trend?

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My favorite way is to enter after a pullback, such as a flag or small wedge. Even better is to enter during a retest or at the top trend line of a flag. I find the moves thru resistance of a flag or wedge can be quite explosive and i want to be in the trade before that happens. I try to find,(i.e. wait) a low risk setup to do this. Fibb is ok, but i would use the 50% more than anything. I also use volume and the Time and Sales to help confirm the conviction of ull vs bears during the pull back and subsequent action.

 

Cheers,

 

 

XS

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Yeah entering a long on a halfway back retracement (Fib 50% Line) with a corresponding low tick is a great entry. Flipped for shorts with a corresponding high tick. I have a ton of live data that I input into StockTickr from my trades that I use to continually fine tune and tweak when I discover new things.

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