Trend trading is a fine money machine, provided you have the right entry system. Spotting a trend is not that difficult, but judging its future potential is much more demanding. The more direct way of assuring profitable trading is an entry system that allows for a tight stop. There are successful trend traders concentrating on the future potential, but that is more for the masters.
For a beginner the insurance for black numbers is a trading system that combines entry thrust with a reasonable stop system. Alternatively a trading algorithm that decides whether the market is right now more inclined for a short or a long trade can do the right timing.
Here we have them, the two grand methods for trend trading. Either find entry spots with a price moving in the right direction or trade in and out of a position or switch it from long to short. The first method needs some short term strength and the second one detects like a balance the current tide of the market.
The short term strength method is best accomplished with day trading. Enter the market in the direction of the longer trend and have a tight stop that makes for the day trading system sense. If you don’t get stopped out, hold the position and raise the stop for the next day to your entry price or leave it at the low of the entry day. There are variations how to do it, but the basic idea is to switch the system to a longer term buy and hold scheme as soon as your position got off the launch pad.
With the balancing method a swing trading style is targeted. Swing trading is trading of embedded short trends. For participating in longer running trends you could just swing trade the shorter trends the whole way up, or down if you prefer shorting. The result would be longer spurts in trend direction and shorter counter moves.
Similar to the day trading system the swing trading strategy can also at some point be replaced by the above mentioned buy and hold phase. The signal for the switch could be good news or a price crossing a threshold gain.
The short term strength method and the balance switching system have an important advantage in common. They both allow for a relatively easy execution of a stop loss plan.
The algorithmic switcher has intrinsically built in the action plan for adverse price movements. It just switches out of the position. For the short strength method it is at least easier to execute the stop. With the statistical entry gain the psychological weakness, which drags the trader away from taking the loss, should be less influential.
However, if pulling the trigger to put on the position is your problem, automated trading is highly recommended. Day trading systems don’t help much with psychological problems. For entering a position a trader has to be in a balanced trading mood. Being too optimistic is very different from being too anxious, but both are deadly for trading. The former leads usually to a big bang, unfortunately one that implodes, and the latter to the silent running out into the cold dark.
Trading on entry momentum is done best by day trading. Gauging the market’s mood and swinging swiftly with it, screams for automated trading. Day trading is for the human trader and swing trading for the robot.
There is another big difference. The day trader has the chance to always get on a trend if the current trading day allows it. The swing trader with his more crude long vs short switching signal has to get on the trend when there is a signal. Possibly he has to wait for a long time until the next signal in trend direction occurs.
For instance, the upswing may be ongoing for days or weeks after our trader finally decides or finds out that the underlying long trend is worth to be traded. He has now two alternatives, waiting for the next but one switch signal or entering immediately. The latter case would clearly violate the swing trading algorithm and the former one would evaporate the chance to enter many trends while they still go.
Day trading will get you on the trend earlier. Sadly, there are days that don’t work. Either there is no chance at all to make a reasonable trade -with a chance for a long term hold in mind- or you are going to get stopped out nonetheless. That can happen many days in a row, which may prove to be psychologically destabilizing.
Technically the outcome may be similar to the late coming of the swing trading autotraders. The day trader may finally have entered the long trend, but too high, so that the trade gets eaten by the following longer term downswing.
For growth stock traders it is important to get in when the whole market swings up. There are situations of breaking news that offer an entry decoupled from the market, but typically the index modulates the long ascent of these stocks so strongly that the entry has to be aligned with the index.
If you are a growth stock or trend trader, you have to try to get on board again and again. That’s the secret of trend trading and your strategy should reflect it. The day trading method and the automated swing trading are probably the best ways for taming the monster trend.