The Mechanics of a Trend

My trading consists of signals for trading existing trends. A stock or ETF breaking out to all time highs or breaking down to all time lows after being range bound is one trend trading entry signal to go in the direction of the break out. I also use signals to buy off key supports levels in longer term up trends like price trading over the 50 day or 200 day simple moving averages or near all time highs. When I find a trend that is just beginning I will try to let a winning trade run. But I sell if I am wrong quickly attempting to never lose more than 1% of my total capital on any one trade. 

That is how I trade trends:

  1. A trend begins with capital flowing into an asset based on a perceived increase in the future value of the asset.
  2. Up trends can be identified by higher highs and higher lows in your chosen time frame and the reverse for a down trend lower highs and lower lows.
  3. Moving averages can also identify trends based on a moving average when sloping up or sloping down visibly. 
  4. A moving average can also act as support or resistance for a stock as it trends in one direction and bounces off a key moving average.
  5. Trends tend to persist because the owners of the asset have no reason to sell and tend to just let their position ride causing the trend to continue.
  6. Supply and demand causes trends when you have a lot of dollars chasing a limited asset.
  7. In stocks, up trends are caused by investors and mutual fund managers building large positions in their favorite stocks.
  8. Down trends in stocks are caused when investors and institutions start to unload a stock or investors cash in their mutual fund shares during bear markets and managers have to raise cash by selling their holdings.
  9. Capital is always looking for great returns so they chase stocks with the biggest earnings expectations planning on the stock price following.
  10. Trends tend to persist until acted on by an opposing force. Sometimes this is as simple as running out of buyers or sellers of the asset.

The money is in the big trends, look for them, find them, and trade in the trends direction until they end.

“The trend is your friend until the end when it bends” -Ed Seykota