Trading With The Trend

In any asset class that you trade in, it is recommended that you always trade with the dominant trend. Many traders also take counter trend trades but the chances of the counter-trend trades working out are small.

The trend

What makes a trend like this in the market? To spot a trend you need to be able to see a line of highs and lows that are higher than the previous ones in an uptrend. Similarly, in a down trending market, you need to see a line of highs and lows that are lower than the previous ones.

To plot the trend line you need to use two or more highs in an uptrend then connect them with the trend line. Leave the line forward and this lets you draw your trend line in a bullish market. Similarly, you need to pull the trend line using the higher lows in an up trending market. This forms a range in the market. When you draw the trend lines in an up trending market take care to take only a long position when the price reaches the low line which is the support level. Never ever short the asset in an up trending market.

You can also draw the trend lines in a bearish market. Hereyouneedto connects the lower highs in order to draw the resistance line and the lower lows that are the support lines. In this case, you will be looking to short the market when prices reach the resistance line.

Reversal

The trend lines also let you spot the areas of reversal. So suppose that the market is in an uptrend and you have your trend line in place. The prices touch the support and the resistance levels of the trend line and keep bouncing from it. However, once the price penetrates through the support line and falls below it this gives you an indication that the uptrend may be at an end.

Similarly, in a down trending market, you have your trendline in place and the price touches the support and resistance levels and bounces from it. However, if the price penetrates above the resistance level then this could be an indication that the downtrend is about to end.

Stop loss

When you are trading the market using trend lines then make sure that you keep a protective stop loss above the trend line in the case of shorting the market and below the trend line when you wish to go long on the market. This lets you protect your capital in case the price does not honor the support and resistance levels.