The most basic component of a trend trading system is the stop loss. It does not only keep losses in check, but it assures that your new investment is trending in the right direction, at least at the beginning of the trade. If the position gets stopped out, the trend may have come to an end. If not, it has the chance to advance. The stop loss method makes you trading trends automatically.
Building on the stop loss technique, trend trading can be combined with day trading methods. Enter a position with a very tight stop in a situation that should yield a small gain and instead of selling it intraday, just hold on. If done in longer running trends, there may be a chance that this system positions you in a long trend with a possible huge gain, while maintaining a tiny entry risk.
This day trading entry system could be added again to a swing trading style. Looking for the right entry point on the brink of an upswing in an ongoing trend may offer the right timing for the mini entry risk technique for day-long-trend-traders.
The classic entry signal for trend trading systems is of course the breakout of a base in the trend, the restart of a trend. Breakout signals are generally interesting. Many traders evaluate them by putting the price span of the base in relation to a possible move and declare that being a risk reward relation.
Doing so is not completely unreasonable, but often it suggests a lower risk then there is in reality, while not giving a real clue about the possible potential. The simple market maker trick to keep prices in a narrow range, while gauging to which side it eventually will break out, and then loading up from the other side, driving the price into the breakout zone, is one example while this risk reward calculation is bogus.
Minimizing the risk with a narrow base breakout is more a day trading technique. Playing the breakout of a base in a trend could be done better by looking for a trend with potential. It is more the big picture than the tiny detail of the entry setup. This is why seasoned trend traders like Ed Seykota used to say that the entry point is almost unimportant. Ok, this is for one a drastic assertion and then it represents only some specific trading style, namely the search for some trend switching formula.
But the message should be clear. Looking for the perfect entry spot in a trend will most often let you miss the trend at all. Then it goes higher and higher, eventually devastating your psychic moral and your believe in your trading abilities and your system.
To top things, you are buying just in the moment the trend tops out. This is the same cruel game that the market plays with traders who became investors because they missed their stop. Ironically in the moment when a trader holding a large loss breaks down and finally pulls the emergency break, too late of course, the market reverses.
Missing a trend is pure poison and similar to missing a stop from a psychological perspective. But missing the stop should be easily avoidable, much easier then to enter the trend the right way.
That leads again to the simplistic method to just enter a trend as soon as it got identified as such, and then come up with a sensible stop that stands in relation to the noise or swinging amplitude that the trend showed so far.
Hitting the trend then without any specific entry setup has the enormous advantage that you won’t miss it if it turns out to run further. It will also put you earlier on a trend. On the flip side is of course a bigger nominal entry risk, because an allowed pullback before the stop loss gets triggered has to be bigger than with some specific “low risk” entry patterns.
The above leads to another method of trend trading. Just enter the trend when it is in its infancy. This is of course only possible for trends that are induced by news. During the rush of the first day or days there is a smooth high volume pop.
The trading trick here is to understand that some news get not digested right away. The market needs time to think about the event, the price doesn’t gap immediately up or down to the level of equilibrium and a trend can form over days, months and even years. Just have a look at charts. There are thousands of examples. Trends that started with a big bang and then continued literally for years.
Final message: It could pay off to become a big bang trend trader.