Trend trading with moving averages can keep you out of choppy conditions in the Forex, futures and stock markets.
There are many trend trading indicators and many trend trading strategies, but I find that using a 50 day moving average strategy is the best way to keep a trader out of non-trending market conditions.
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Welcome to this video on trend trading with moving averages. Today we are going to look at a very simple concept, but a very important concept. And that is the cycle of trends. That’s right. Trends actually go through cycles. That essentially means that sometimes the market is trending, and then it goes into a period of non-trending, non-directional. Now first of all let’s define trend.
A SIMPLE TREND FOLLOWING STRATEGY
Webster’s dictionary defines trend as this, “The extended general direction.”
This definition tells us that the word trend means a long-term move, as implied by the terms “extended” and “general” in the definition. Whenever you’re talking about trend, you are referring to a long term move, not a short term move. I like to use the 50 period simple moving average and that’s this line right here. I have it color coded so when it goes up, the trend is green, when it goes down, it turn red.
Now if it’s just flat, I consider that we have no trend. It’s a trendless market. We are in a cycle of non-trending. A non-directional cycle at that time.
TREND TRADING WITH MOVING AVERAGES
Another thing that I do however is I also look at price action in relation to trend trading with moving averages. We have it above the 50 MA, and it goes below the 50 MA. Then it goes back above the 50 MA, then back below the 50 MA. Then back above the 50 MA, then back below the 50 MA. We consider that a trendless market. We are now in a cycle of non-trending. It’s basically directionless. In the sense that it’s not committed to either bullish direction or bearish direction for an extended period of time.
I use 50 period moving average, but also this black line that is the 15 EMA. Many traders use a 20 period moving average strategy, but prefer the 15 exponential moving average.
Now how do I use that? It doesn’t define trend for me but it defines the relative strength of the move. I’m not trend trading with moving averages of either the 15 EMA or the 20 SMA. Nor am I interested in a moving average crossover.
THE BEST MOVING AVERAGE STRATEGY
I don’t want price to come back down below the 50 MA, in order for us to sustain a trend, I actually want it to stay above the 15 EMA to indicate that it’s a fairly strong trend. As long as it’s above the 15 EMA in an uptrend, therefore the relative strength is to the upside, and we got a good trend. As you can see here, we have 5 waves and then a failed 7. Five waves today is about an average that you are going to get on a trend. And basically I am talking about higher highs and higher lows. These are not Elliott waves.
Now let’s take this a little further. We went from a non-trending market over here. We use the moving averages as basically, well creating structure. You could see that just looking at price bars if you wanted to. But I think using the moving averages helps you to see even it more clearly because there is a clear structure there with price in relation to the moving averages.
TREND TRADING FOR A LIVING
Alright so we went from non-trending to trending. Now let’s see what happens. So as the day goes on, well what happens? Okay we kind of start getting all messy again. Don’t we? So we put in our, the top of our trend here, and now things get a little messier. So what you will see here is that we go down, we do get below the 50 MA, 50 MA does turn down.
But look what happens to our 15 EMA. Price comes above it and we get an open and close above the 15 EMA. Now it does go down below it, then it comes back up above it. Again this basically what’s happening here, the market logic, as I like to call it is that when it breaks above the 15 EMA. That means that’s short. We’ve had some major selling here.
TRADE IN THE DIRECTION OF THE DOMINANT ENERGY OF THE MARKET
Now in order for this market to resume a trend right away, we want that dominant energy of selling to remain in the market. So we don’t mind some oscillations. We don’t mind a retrace but we just want to retrace to the 15 EMA. Why? Because that indicates that there may be some profit taking down there. And maybe some retail buying, but no professional buyer. We don’t want a lot of strength coming back up. Because that would indicate that well, there is a lot of volume coming in, lot of buyer volume, may be some professional buyer volume. And that then dissipates the downward energy of the market, the dominant energy of the selling.
So when it gets up above there that indicates, ‘oh okay, hmm well we are getting quite a bit of buying.’ Comes down, makes a higher low, higher high, another higher low, higher high. So even though eventually it goes down and makes a lower low. Boy these are tough times to sell. And you wouldn’t want to because we are looking for an imbalance. We are looking for the market participants to maintain a very very bearish sentiment. And when the market comes back above the 15 EMA, that’s one indication that they have not retained a bearish sentiment at that time. And at that time is critical because you have to determine what time are you going to trade.
THE RUBBER BAND TRADE
Now this actually is a rubber band trade here. And this is the trade I give away for free. It’s a great little trade there and so anyway if you like that, feel free to request that. We give that away for free in a free video. And then it, we come down, and we make a little double bottom here. How much time do we have? Oh we got time for a little bit more. Alright I’ll give you a little bit more.
So again just to engrain the pattern into your brains, again we go back in to a cycle of non-trending. So get used to this, don’t think that just because the market stopped a down trade, that is then going to turn into a uptrend. In fact that’s rather rare. Normally the market, after it’s done with an uptrend goes into a non-trending market, after it’s done with the downtrend. It goes into a non-trending market cycle.
TREND TRADING FOR DUMMIES
Trend trading is best when kept simple. There are many fancy trend indicators, but I’ve found trend trading with moving averages as well as anything. BTW, I’m the author of Trend Trading For Dummies (Wiley Publishing). It’s a great resource if you want to dive deeper into the subject.
I try to keep these videos short, so that we just stay to the point and give you a few examples, though I like to give you more examples so that you can see some of the variations and help get the pattern ingrained into your brain cells. So when you see them in your real trading, you’ll have seen several variations.
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