If you trade in the markets I’m sure you have heard the phrase “the trend is your friend”. The phrase makes seems to make sense, IF you truly understand trend trading.
If I had the opportunity, I would change the phrase to “The Trend is Your Friend, IF you know which trend you should be looking at.
Many times I’ve met traders that look at long term trends, but seek a short term trade. Personally, I think this is a rookie mistake since they are only looking at one trend. I can show many instances when traders take losses thinking they are trend trading, which are, but they are selecting the wrong parameters when determining the trend.
For example, one trader I met used the 50 day moving average for swing trading two to three day moves. He has the right idea, sort of, but the price of the ETF could literally fall 10% and the trend would still be intact. Since he was swing trading for such a short time period compared to his trend indicator he couldn’t give his trades enough “wiggle” room to actually work. Therefore, he was constantly getting stopped out for a loss only to see the ETF rally back to a profitable level a few days later.
What’s the moral to this post? Traders need to select a trend that corresponds to their trading time horizon. My trade time horizon is about half of the time it takes to create the end value of the indicator. For example, a 10 day moving average would generally command a four to five day holding period for the ETF in question.
For more swing trading tips or swing trading education visit my website http://www.etfupdater.com/.
Good Luck and Happy Trading
Mike Matousek, CMT
Portfolio Manager, ETF Updater
www.etfupdater.com
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