Profiting with Up and Down Trend Strategy
Profiting with up and down trends is one of the most basic strategies in any form of trading. This is a very simple concept which can make you very profitable. The saying goes “Let the profits run, cut the losses short”. Once you catch the right trend and ride on it till it turns, you will realize that this one strategy will make a big difference in your stocks trading account.
It is surprising though that some people simply stick to the buy low sell high concept without even taking a look at the trend. This is totally insane! Many friends and old folks that I know of, whom have no clues about charts, simply follow the buy low concept without realizing that the stock they are picking on is on a down trend and possibly heading even lower. Knowing the trend is critical!
1. Identify the trend
Is it an up trend, down trend or a sideways trend? You will want to pay attention to the up and down trends for this particular trading strategy. Refer an earlier post on trend lines to recap. Always use a longer time frame like a weekly chart to determine a longer term trend, and switch into a shorter time frame like a daily chart to better determine your entries.
2. Find the resistances and determine your entries
Draw out the trend lines to determine the resistances. This will help you determine your entries. It is safest to enter your positions near to the resistance. Entering an entry position that is right at the resistance level may mean that you might not get your position filled, hence it will be wise to enter slightly away from the trend line (higher on an uptrend and lower on a downtrend). However, try to stay close so that you do not risk losing too much if the trend does go against you and get you stopped out of your trade.
Figure: Basic uptrend line
3. Determine your position size and entries
Determine your entry size based on the 2% rule covered in risk management. You can further break up your positions into 2 or 3 smaller portions to better manage your risk. With each successful entry which catches the trend, you will be able to set a wider stop loss with the profits locked in.
4 . Set your stop loss
With each successful bounce off the resistance, move up your stop loss accordingly so that you lock in your profits. This is to prevent yourself from losing away your profits and worse still, hang on to a losing trade which changed trends.
5. Take profit
Taking profit is equally important as to entering your trade. When it is best to exit your trade? While riding a trend, it is critical not to be too eager to close out your trade before the trend ends. The key to the up and down trend strategy is to ride the trend till the end. This ensures that you gain as much money as you can when the trend is strong. Close your trades and take profit only when trend is broken.
There will be many occasions where you get a false breakout. You may or may not be stopped out of your trade depending on how far you set your stop loss. Say if you do get stopped out and the trend bounces back and continues it’s trend, you can actually re-enter your position. However, do a sanity check to see if the price has risen too much. Determine this by calculating how many percentage points the stock price has risen from the start of the trend. Do also a historical check to see how far the stock usually runs. Say if a stock has risen 50% of it’s usual run, you then have to cut down on your entry size by half to ensure that you do not over expose yourself to risks.
For my entries, I usually like to start with 1/3 of my total position size. This allows me to test the markets with my first position with a smaller size check if the trend is right. Usually when you are at the start of a trend, it is hard to be sure if the trend will continue. I’ll add more positions as the stock trends or cut my loss early if the trend breaks.
- Profiting with Breakout Strategy
- Profiting with Dividend Stocks
- Trend Lines
- Risk Management Differentiating Survivors from Losers