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 Dell Computer Corp. (NASDAQ: DELL)
Although DELL has been in a trading range over the past few weeks, by using
moving averages, a trader would have been on the correct side of a trade.
Profits would not have been great, as DELL has not moved much.
Today (Tuesday), DELL signaled a new Buy signal and a change in trend
direction.
I would Buy Dell on this new change in trend as defined by the moving
averages.
I would place a stop at 39 7/8.
