Four important facts about trend trading
1. it's the safest way to trade--to trade with the trend
2. trends move markets and are the basis of all profits
3. it's miserable being a trend trader, you lose 67 percent of your trades!
4. there are two ways to trade with trend
1st. trading breakouts in the direction of the trend:
* never missing a big trend
* using large stops
2nd. trade retracements
* possibility of missing big trend
* using small stops
Trading breakouts of higher prices or lower prices in the direction of the trend, such as the popular Thrtle channel breakout strategy, is a successful strategy for trading with the trend. Breakout strategys do not wait for a retracement or pullback in an uptrend before entering the market on the long side. Nor do they wait for a relief rally or retracement in a downtrend before entering the market on the short side. They will buy much higher prices in an uptrend, and they will sell much lower prices in a downtrend. The advantage of trading breakout is that the trader will never miss a big trend. A disadvantage is that breakout trend trading requires larger stops than retrancement trend trading.
Retracement trend trading requires the market to pause and experience a pullback in an uptrend, or a relief rally in a downtrend to enter the market. A disadvantage of retracement trend trading is that sometimes strongly trending markets do not provide a retracement opportunity for a trader to enter in on. Retracement trend trading can and does miss some big trends. However, an advantage of retracement trend trading is that it does allow a trader to place much smaller initial stops.
* It's All About Support and Resistance
At its core, practical retracement trend trading is about finding areas of support to buy and finding areas of resistance to sell. Not only is trading about identifying support and resistance level, but it's about identifying good support and good resistance levels. A good support level will exit in, and confirm, an uptrend. A good resistance level will exist in, and confirm, a downtrend.
These definations encapsulate the essence of successful retracement trend trading. When in an uptrend, traders should only be looking to identify good support levels for entering long trades. When in a downtrend, they only be looking to identify areas of good resistance for entering shorts.
In addition, traders need to accept a core belief about price movements: Prices do not move in a straight line. They meander up and down.
Prices will rotate back and forth and will not head in one direction, either up or down, in equal and discrete linear measurements. Uptrends will experience rallies and pullbacks. Downtrends will experience falling prices and trlief rallies.
Markets do not head in one direction without pause. Successful retracement trend trading, will see traders enter long positions after pullbacks in an uptrend and enter short positions after relief rallies in a downtrend.
An important factor in retracement trend traders' success is their patience in waiting for pullbacks and relief rallies, that is, retracements of the previous price trend. They know that in uptrend, the market needs to come down first to go up. They know that in downtrend the market needs to go up first to come down. Practical retracement trend trading is all about patience in waiting for markets to come down to areas of support in an uptrend before entering longs and waiting for relief rallies in downtrend to find areas of resistance to sell. Practical retracement trend trading is nothing more and nothing less.
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