Trend Trading

The Simple Trend Trading System

Modern investors are actively invest-trading the markets. Buy low and hold forever was yesterday. You will need only one thing for being the silver surfer riding the monster wave. Something that gave Trend Sigma its name. The meaningful trend...

The trend is your friend and trend trading can be the most profitable form of trading. Trend Sigma is trend trading, swing trading, and investing together. It is all about jauntily entering the next megatrend.

At the end of this article we are going to reveal how to do this. Okay, here is the shortcut:

How to enter the right trend?   Do the Zen Trade !

Zen? There are reasons for it. One of it is to make people curious, but there is more to it...


If you haven't become curious enough by now to follow the Zen trail, let's start with some abstract thoughts about trading and a primary question:

When to get in?

  • Is it right to buy into falling prices or better to wait for them to stabilize?
  • Could it be necessary to wait a little longer and buy only the first move up after a fall?
  • Should one chase rising prices or even wait for a base after a rise?
  • Does waiting still a bit longer for a restart of the trend after a pause give the needed additional boost?
  • Or perhaps ignoring price action and concentrating on fundamentals is the best thing to do?

The answer is: It depends, but not on the situation. Instead, it depends on the trading system you use, which should be clearly aligned to one or the other style. In other words, one can make money in the markets with cyclical and anticyclical systems. Just don't try to mix one method with the other.

Trend trading means going with the flow

Almost by definition procyclical behavior is mandatory for trend traders. The best trend traders enter a trend at the current high, for short-term entry situations and also for longer terms. This has two advantages:

  • The probabilities at the start are skewed to the trader's favor. The high indicates a running trend, there is pressure that drives the price further and makes an entry easier.

  • There is a trend at all, which means prices are moving in the right direction, perhaps for a longer time. The cyclical method is the faster way to become rich. Anticyclical traders are more investors. They generally need a long life.

The longer trend and fundamentals do matter for a sound system. Stocks could be traded solely on a day trading basis, but that means giving up most of the possible gain. The real money is made by holding when things go well and riding a trend for many month that at its best finally overshoots by a wide margin.

That is why fundamentals are important. Like prices, which run away once they have gained momentum, revenues and earnings of companies that rise do this often with a remarkable constancy. We have a growth stock. It pays off to take rising revenues into account. Over all concentration on such stocks will yield better results even if the targeted time horizon of holding periods is much shorter.

Advantages of stocks

One of the beauties of stocks is that they are essentially options but without the expiration date. At least this is true for stocks on the move. It is possible that they multiply their value by a large factor, and yet, they can't go below zero. This alone is highly interesting, because it offers the possibility of a random trading system, just driven by stronger moves upwards than downwards. Of course this effect only becomes noticeable if you hold a stock for a longer time. Day traders go away empty handed.

Another fine thing about stocks is that there are stock markets, by which I mean that there are thousands of possible trading candidates. Compare that to Forex or futures. Together with ETFs, some of them being short-instruments and others matching foreign markets or commodities, there is always something to pick. Without the need to go short you can still enjoy the option-characteristic of stocks.

Why a system and why rules?

Strict rules condensed into a trading system are important because there is psychology involved. Experience tells that a system that concentrates either on cyclical or anticyclical methods and doesn't try to mix them, is far more easy to apply. A system whose elements are uniformly supporting either one or the other style is enormously helpful. There are more than enough reasons to get confused by the markets alone. Psychology is the deep problem of a trader. He needs a trading system as a foothold for combating uncertainty.

The most basic rule for the concrete trading is the stop-loss. This is the ingredient that makes cyclical trading what it is, meaning it is far more than just keeping losses in check. If you enter a position and don't get stopped out, you are on a trend. If you get stopped out, the trend has come to an end. This is of course a simplified and probabilistic view, but it shows how a rule of a trading system steers the trader into the right direction.

For anticyclical investing a stop-loss is devastating, because it is contradicting the idea of buying as cheap as possible. This is a fine example where in trading the right element can be in the wrong system.

What is a trading system and what is it not?

A trading system must be self-consistent. All parts of the system must fit together. Something that doesn't fit, while it may be the right thing for another system, is like a grain of sand in the machine, the money machine that is. So, is there a money machine? Yes, but...

This machine can't serve everyone. As common sense tells, there will only be few who can exploit a specific system. A system that is trading the high and overshooting prices has fortunately a relative large capacity and is able to support quite some people's desire for success.

Trading at the high means also something else. The simple trend system only buys stocks long and doesn't go short. Together with the rules to allocate the trading capital to the right number of stocks and not to use margin, at least not overnight, it more or less assures that you can't go broke. Money management is the part of a trading system that should be nothing but a pure machine.

Of course, even the best system and the best money management can't guarantee that a trader will not incur losses, contrary to what so many want to believe or want to make others believe.

The market and its system

Astonishingly, chances that prices go in the right direction relative to the wrong one are almost always about 50:50. The best bet for the price some time ahead is usually the current price. This is the universal law of the market and, whereas I hesitate to add this here, it is almost independent of any feelings and ideas you might have about a bias of the future price direction!

The reason is the market itself. In most situations prices are near an equilibrium. Not only that demand matches supply, but also chances for up- and downwards moves approach each other. The market mutates its state constantly so that it is hard to figure out. It has to be this way.

But then, how to trade? You probably guessed it by now. Chances can diverge when the price is on the move. That is why momentum traders operate at the high.

Philosophy of Trend Sigma

The basic principle of our simple trading system is to get on board of an ongoing, starting or restarting movement with a tight stop in a situation where price pressure gives statistically more often than not a good start. The preselection of stocks at a longer term high with rising fundamentals will then do, again statistically of course, its magic and produce some bigger gains over time.

In short, the simple trend trading system enters at the day high or near the high of a short term move and that in a longer term trend possibly with fundamentals also on the rise. This is the ideal, but in reality it is more complicated than identifying a buy signal every time the price is near a high in all time frames.

Prices can get ahead of themselves and become vulnerable to swinging back. What we need are forces that are not exhausted. Oscillations are a necessary occurrence in all time frames, otherwise the market would be too easy, everyone could figure it out and everyone should win, which is impossible.

Then there is the "magnetic" effect of the whole market. Relative strength can indicate price pressure even with prices going down. The ideal of trading at the high has to be adjusted to cope with these oscillations, random influences and index induced forces.

What about swing trading? Perhaps it could not easily be seen as cyclical, because the swing trader typically waits for a price retreat and then for the first turn of the tide. A trend trader should also be able to trade swings being in a longer trend. This way the regularity of swings are converted in entry safety and exploit still the power of the trend, which is a basic method for managing oscillations. You are a swing trader and you knew this already or find it simplistic? Well, look at your trading history and see if you applied your knowledge!

Fine theory and ugly reality

In reality things differ from the ideal and so a trading system needs some robust rules for dealing with the real world. The classic problem is an ongoing trend and a trader waiting for a dip. When it finally comes, the trader gets in but the price doesn't want to swing back and the trend has topped out.

One of the key elements of trend trading is to get on the trend as fast and riskless as possible. Ideally the trend is smooth, the swings are clear, the start is crisp. That would be the easy case, but reality looks mostly different.

Does searching for specific price patterns in longer ranges result in high-probability trades? Or do we have to identify specific fundamental situations for nearly riskless entries? The answer is no. There is absolutely no reason why the former should work, and while there may be clear situations of the latter type, they are too seldom.

Chart wizards and fundamental number crunchers, I hear you grunting now. It may be hard to believe for you, but it doesn't work this way. There is no way to identify infallible signals or secret patterns beforehand. Using a trading system is bending statistics to your favor and not hoping for investing wizardry.

So, what is it then?

Two profit driving forces

  • The most powerful chart pattern is the trend, because it means something real. There is a valuation shift underway and that is fueled for instance by the specific product of a company. When is comes to forecasting quality, the trend dwarfs all other chart formations and also comprises all too complex fundamental number exercises. Be able to judge the trend and the product situation and you will see the big picture.

  • Trading means overcompensating losses with gains. On the micro-level this is done by having short-term setups with matching stops that make sense.

The longer trend, the right product, and an entry situation with current pricing pressure. Seems to makes sense, but how to do it in practice?

The daily bar chart

The simple trend system uses the daily bar chart, because it has a medium time frame usable for short-term trading and holding a position for a longer time. The other basic advantage is that daily bars are the most natural time frame, mirroring our activity during the day and the pause of the night. If you look at the market through the glasses of the daily bar chart, you will find more regularities than with any other time frame.

The daily bar chart is the foundation for the entry patterns of the simple trend trading system. Entry setups allow for statistical advantages exploiting more coherent movements that arise for short times from a generally chaotic market behavior. Even the atypical usage of daily bar setups for day trading is possible.

It is this advantage at the start of a trade that is psychologically necessary for applying the stop-loss rule. Both combined with the preselection of stocks with a longer term strength lets traders operate near the possible optimum.

How exactly look these setups? Actually there are various pairs of entry and stop-loss that work. For the stock market, as a rule of thumb, the price could be in more than one time frame at a high. Especially it could be at the high of the day when entering. Forex may work with waiting for a dip of about 100 pips to enter the longer trend.

Various setups work. The secret is that the setups are not the secret of a good system. It is the matching of the main parts.

How does the simple trend trading system work?

  1. Look for a meaningful trend.
  2. Enter the trend with a system of your liking based on daily bars.
  3. Determine a tight stop and stick to it.
  4. Try to re-enter the trend until you are in.
  5. Hold for the long run until the trend isn't meaningful anymore.

All five items could be described much more detailed and some others are missing at all. Most notably you need to gauge when the long-term trend has come to an end so that re-entering attempts have to be stopped. In other words, when is a trend meaningful? You also need at least some basic money management.

This wants to be just a skeleton description for a working system. It is more important that the core makes sense for a competitive trading system. Details can be different then.

You expected more? A method that is highly concrete, easy to use by everyone, and success is guaranteed also for everyone? Perhaps detailed secret formulas or precise graphical methods? Something that looks like the surefire system that we have seen a million times drawn into charts?

There is no such thing. It simply can't exist. Everyone would have to be a winner. The markets have to be difficult.

Trading is an art...

You just need this simple trend trading system, but then you will have to scan the markets for the right chance, a meaningful trend, which can be done by following our free newsletter:

RSS Zen Trade ... digging up special trading situations ...

Oil crushes the crashers

The oil crash just took a breather with an abrupt two day uptrend. Will it go further? Hard to say, as the depressing factors are still in place. Reasons for this short-term rocket are most likely news about an encouraging U.S. growth and the relaxation of international equity markets. There are also reports of an […]

The oil crash goes ahead

Oil just made new lows as predicted. Time to get on board of a fine trend if you haven’t done so already. The oil market saw new price lows during the last days. There seem to be two main reasons for that: Iran closed the nuclear deal with world powers and is now on the […]

The German Bunds crash

German Bunds are the short of a lifetime, according to Bill Gross, the bond guru. He seems to have called the very low on April 21 (red circle) of the 10yr Bunds as seen here in the daily yield chart. Did he? Or did he rather influence the market with his opinion? In any case, […]

The oil crash

One of the most remarkable trends of the last months is the deep dive of oil. Oil is tanking! One reason is the US and its ability to exploit previously unprofitable repositories. Fracking has led to an oil glut, temporarily at least. The US just became a net exporter of oil after decades of being […]

How low will the euro go?

What is Zen trading? It is trading done the simple way and that means looking for the right trend and finding the right entry spot. Here we have one, the decline of the euro. While the fundamental reason for this steep decline is the current monetary policy of the ECB called quantitative easing, psychological reasons […]

The trend scalper

This site is about true or real trends. There are two types of chart formations that look like trends. Both are trends, but only for the chartist. Beyond that they are different. One has a reason, a driving force, and the other got just created by random market forces. If a trend has emerged just […]

The Zen trader

Our standard method, the trend trading system, is all about trends. It even concentrates on the best of them. Trading like a Zen master is almost the opposite of trend riding. Essentially the Zen trader is going to bottom fish for the momentum stock. Sounds really like Zen… The fishing grounds are the small cap […]

The art of trend trading

Trend trading is easy. Wrong. It looks only to be easy in hindsight. If done right, it can be very lucrative. You can also do it wrong and then it is the opposite. One basic element for all kinds of trend trading is the stop loss. The advanced trend trader tries to enter the steepest […]

The secrets of trend trading

Is there a secret to trading or are there even many secrets? Or is there no secret at all? Naturally this is a difficult question. If the answer were known, the question wouldn’t deal with secrets. So, we have here a conundrum without a definitive answer. It is more a question with various viewpoints as […]

Zen Trade – Riding the monster wave

Zen Trade’s main operation is trading of investments. Yes, we are investotraders. For that we have a blog dedicated to finding special market situations. It is called: Zen Trade ZT stands for Zen Trade or alternatively for trading systems. Trading system? Right, for trading you need a system, and we have quite some of them. […]

Additionally here are the latest posts about investing and trading from the local blog about general finance and money topics:

The next monster trend for making real money

Trend trading is working best with the right trend. Sounds silly? Maybe, but look at your last trades and think again… We are letting our money work for us by trading the long-term trends in the financial markets. The ambitious investor tries to get on a trend by means of trading and then holds onto […]