Trend Trading or Trend following is a popular trading system. The method involves joining an established trend with an aim to ride the stock in the direction it’s heading and exiting when the trend reverses. A trend trader is either right or wrong and will never hold a position in hope the knife stops falling. The trend trading system requires strict self discipline to follow the precise signals the system is created on.
There are many methods for establishing if a stock is in a trend. The quickest method I have found is using the Market Trend Signal™ trend trading system. The system is fast to finds excellent trend trade setups. It is very easy to see the current rating and trend of a stock. I can also quickly back test the stock to determine the trade accuracy and risk to reward potential on any stock or ETF.
Trend Trading is a trading strategy that relies heavily on defining risk. The major contributor for success is not just sourcing a trend but managing entry and exit. Trend traders have clear trading rules to cut their losses before they turn into large losses, while allowing their profitable trades to run. The Trend Trading strategy cuts positions quickly, forcing the bulk of the profits to be made from a handful of successful trades. The success of trend trading isn’t the win-loss ratio, but the profits obtained from the winning positions. It is important that the trend trading system then defines a tight stop loss, with enough space to allow the stock to continue with its trend and not stopping the trend trader out before the trend resumes.
One easy and effective risk management method is the 2% rule. The aim of this risk management technique is to define an amount that the trend trader is willing to loose on each individual trend trade. The 2% rule calculates this value at 2% of the value of the portfolio. The value of portfolio is calculated by adding the value held in cash, with the current value of all open trades. This value is then multiplied by 2% to calculate the amount the trader should risk. Based on this value, entry price and stop loss price the trend trader can then calculate how many shares to buy to risk only 2% of their account.
For more information on the Market Trend Signal™ trend trading system click here.
