Unless you’re new to the trading scene, then you’ll know that trend trading is one of the most popular ways to trade assets.
Because trends can continue to make money until it ends, traders spend a lot of time sharpening their trend-trading skills.
Here are five questions you can ask yourself when you’re thinking of or are in a trend trade:
1. Are you using tools and indicators that are helpful for trend trading?
It’s tempting to slap on as many indicators as you can fit in your chart but you must only pay attention to the ones that can help you trade a TREND.
This means using trend indicators like moving averages to see the overall direction of prices, or momentum indicators like ADX and CCI to check if a trend is exhausted or is just getting started.
Even price action traders must be careful to only mark clear trend lines instead of drawing lines around clearly broken or immature (read: less than three highs or lows) trends.
2. Can/should you buy on pullbacks?
A trend is usually more sustainable when it has pullbacks. These retracements present opportunities to enter a trend or increase position size. This doesn’t mean that you should pull the trigger on EVERY pullback, however.
For one thing, entering or adding a position increases the mental pressure to close the trade at a profit. This could lead to mistakes that would’ve been avoidable if you had not worried as much about your P/L.
You should only enter on pullbacks if it’s part of your trading plan. If it won’t change the way you handle your trade, and if you don’t end up going over your maximum risk per trade, then feel free to pull the trigger.
3. Are you pressing responsibly?
Pullbacks aren’t the only opportunities to add positions. You can also press your trades by “scaling in” positions at other points as long as price action is still confirming your biases.
But scaling in requires more than just adding units whenever you feel like it.
You must identify the exact price conditions for when you’ll add, know how much you’ll add each time, AND have a plan for locking in profits or taking losses for when the trend eventually ends.
4. Is the trend STILL your friend?
Like good Disney live-action remakes, fidget spinners, and large public gatherings, all good things come to an end.
Even traders recognize that the adage “the trend is your friend” really means “the trend is your friend until the end when it bends.”
To maximize a trend trade, you must be ready for when the trend ends. This means constantly evaluating its momentum and checking for fundamental and technical catalysts that might kill it.
If you’re aware of the trend’s structure and potential, then you can better position your entries and exits to maximize your profits and minimize your losses.
5. Is countertrend trading for you?
Another way to make money from a trend is to profit from its reversal.
Countertrend trading isn’t for everyone though! It takes time, patience, and A LOT of discipline to successfully trade against an obvious trend.
But with a lot of experience, and after doing your homework, picking tops and bottoms is just as good as any trading technique as long as you ALWAYS remember to practice proper risk management.
