How To Trade Trends For Maximum Profit

By David Hobart
30 March 2009

In my experience, riding trends is where most money is made in trading. Trends are where you get the highest reward for the least effort. But riding trends takes a sensitivity gained from countless hours of passionate dedication to the task. Like surfing a clean point break, once mastered, the satisfaction and reward is well worth the initial effort.

In this article, I’ll define firstly what constitutes a trend and why a trend forms in the first place. Then we’ll look at different timeframes and see why observing price action is critical to trading trends successfully.

What is a trend?

There are many ways to define a trend. I define a trend as a market that is characterized by a series of higher highs and higher lows (uptrend). Or lower highs and lower lows (downtrend). Nothing fancy, just simple price behaviour.

Uptrend

Why do markets trend?

Trends occur in markets because as humans, we have a behavioural tendency to be anchored to our recent past. For example, if a growing number of market participants decide that they want to buy, then they will each share a similar emotional experience. Firstly, having seen the market move up during their period of analysis, they decide to buy just above the recent low. Some of them will buy on this dip, but many that don’t will get impatient and buy a break of the recent high. The cycle will then often repeat; causing a series of higher lows and higher highs.

So what’s your timeframe?

This pattern of higher highs and higher lows can be identified using a 60 minute chart or a weekly chart.

The markets are often trending, the trick is to determine over what timeframe does the trend exist? What might look like a sideways market to a long term investor, could provide numerous intermediate term trends for the speculator. What seems like choppy markets to a medium term focused speculator, might be many short term trends to the day trader.

Defining the context of the trend

It is important to understand how the short term trend relates to the intermediate term trend; and how the intermediate term trend relates to the long term trend. Simplistically, a change in the long term trend will always be seen first in the intermediate term. Likewise, a change to the intermediate term trend will be seen first in the short term trend.

For example, in identifying an end to a long term downtrend, the intermediate term trend will be strongly up before confirmation that the long term downtrend is over. It is amazing how many longer term traders get chopped up because they don’t pay attention to the subtle changes occurring to the market at shorter timeframes. Conversely, many short term traders get chopped because they are trading against the intermediate term trend. Being aware of the trend over different trading timeframes is critical to success as a trader.

Observing price action is the key

This is why the daily disciplines of observing price action can be so valuable even to a long term trader/investor. Personally, I update handwritten point and figure charts each day to keep me firmly focused on price; even though I’m trading intermediate to long term trends. This price focused discipline provides me with a greater sensitivity to the changing trends within different timeframes.

If you would like to find out more about David Hobart’s trading coaching and mentoring programs, please email David at dhobart@traderemotions.com.au  . 
 

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Disclaimer: The contents of www.traderemotions.com.au is general information only and in no way provides advice in a personal or general nature. David Hobart and his related entities can not be held responsible for any loss, cost or expense resulting from your activities related to the subject matter in this document and or relating to www.traderemotions.com.au

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