Trading Trends For Profits

In the financial markets, a trend is generally understood to be the current market direction. Markets can be trending higher, trending lower, or trending sideways.

But defining a trend so that it can be profitably traded is something else entirely.

Many would say the S&P 500 Index is currently in a bullish trend. But at the same time, the Nasdaq Composite and Nasdaq 100 Index have been trading sideways for months. So trends can obviously exist for one sector while another is going nowhere.

Just saying that a trend consists of "rising" prices, or "declining" prices is not enough. Every day is different. A trend must be clearly defined in order to be profitably traded.

And what about time frame? Are we talking about a trend on a 5 minute bar chart where it could last an hour? Or is it of longer duration; days, weeks, years?

It is easy to determine trends on a chart of prices that have already occurred. Developing a trading strategy that will keep you on the right side of future trends is needed to profit from trend trading (market timing).

Successful market timers know and use several facts about trends that give them an edge in trading them:

1.  While financial markets may spend time in consolidation (sideways trends), they are more often moving up or down for sustained periods of time.

2.  A timing strategy that defines trends can be used to take advantage of continued momentum in the market place.

3.  Trends tend to go higher, or lower, than most investors expect. So correctly identifying and trading a trend can be very profitable.

4.  Profitable trends occur only once or twice a year. The rest of the time the markets trend sideways. The Nasdaq, for example, would have to be considered as being in a sideways trend over the past several months.

Because tradable trends only occur once or twice a year, market timers must be prepared to sometimes wait months before catching that one highly profitable trend.

a.  To be consistently successful over time, market timers must have clear rules telling them when to enter, and when to exit.

b.  When in a sideways trend, market timers often have multiple trades that result in small losses, or small gains. These small losses and gains "must" be accepted because timers "must" trade every identified trend change. There is no way to know "ahead of time" which trend will be the highly profitable one.

c.  Market timers usually make the majority of their profits in only one or two trades a year. If you don't take every trade, you will likely miss the one that makes most of your profits.

d.  When the markets are in a bullish or bearish trend, trading position changes may not occur for months at a time as the trend progresses. Exiting early to lock in profits can cost you dearly. The trend must be allowed to play out without making unnecessary trades because of volatile short term conditions.

e.  A profitable trading strategy will "not" allow a market timer to miss that trade!