Defining Trend
We hear the comment over and over again that a trader should trade in the
direction of the trend. This is critical for Intra Day traders, short term
and even mutual fund managers.
But how does one define trend? The first requirement is to define time
frame. The trend on a 5 minute bar chart may be different than that of a
daily bar chart.
The time frame can differ between, but the indicators and studies still
work in most time frames.
For our example here, we are going to use the crossing of a 5 period
exponential average and a 20 period exponential moving average. The bars in
this column are 60 minute bars.
Moving averages will never get you in at the bottom of a move, and will not
get you out at the top. It will help you catch the meat of major trends.
As a Day Trader, I always have my finger on the button. When I see an
indicator that says exit, I am out. There are no ifs, ands, or buts. You
have a plan and stick to it.
Since I am in front of a machine all day, it is easy for me to enter and
exit trades. For others, an order in anticipation of a signal may be
appropriate.
Let's look at an example in Citigroup, Inc. (NYSE: C).
>From a break away on October 19, 1999, C has been trading with its short
term moving average line above the longer term as can clearly be seen on
this chart below.
For the first time since October 19, C has now had the short term 5 period
moving average drop below the longer term 20 period moving average.
If we were going to define trend with moving averages, a trader would exit
longs at this time.
An aggressive trader may want to Short C on any morning weakness.
If a short were initiated, I would place a stop at 55 �.
Have a plan and stick to it!
