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https://youtu.be/eYqzcqDtL3k
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Trend
What is a 'Trend'
A trend is the general direction of a market or of the price of an asset, and trends can vary in length from short to intermediate, to long term.
As a general strategy, it is best to trade with trends, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction. A trend can also apply to interest rates, yields, equities and any other market that is characterized by a long-term movement in price or volume.
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BREAKING DOWN 'Trend'
The trend is your friend. This is rule of law for many traders. Following the trend is one way traders attempt to predict the future direction of an asset’s price.
Trend Analysis
By definition, trend analysis is based on historical price movements. As a result, it may seem to fit best under the jurisdiction of technical analysis. Technical analysis looks at historical trends and changes in price to determine the future direction of prices. By contrast, fundamental analysis looks at changes in the performance of an asset, such as earnings or revenue. That said, fundamental analysts can also look for trends in earnings per share and revenue growth. If earnings have grown for the past four quarters, this represents a positive trend. However, if earnings have declined for the past four quarters, it represents a negative trend.
Trend Lines
One tool traders use to identify a trend in stock price is the trend line. It is a line drawn between the high and low point for a stock over a period of time. If the stock price goes up from $10 to $20 to $30 over a three year period, the analyst can plot a line from $10 to $30 starting in year one and ending in year three. The first year marks the first plot in the series, it is the baseline price of $10. The second year represents the beginning of the trend at $20, and the third year marks the continuation, or possibly the end of the trend, at $30. In this way, trend lines can be used to either predict the next data point along the trend or look for a reversal of the trend.
Trend lines can also be used to form a channel marked by two lines. One line is created by trends in the highs for the stock. Another line is created with trends in the lows for the stock. The price is then expected to trade in a range between these two lines to form a channel.
Not a day goes by in the media where the moving average of a particular investment isn’t referenced. Oftentimes, the market’s current level is referenced in terms of where its 200-day of 50-day moving average is, using that as a justification to buy or sell. Below the moving average? It’s a downtrend…sell, SELL! Above the moving average? It’s an uptrend…buy, BUY!! (For the uninitiated, read "How to Use a Moving Average to Buy Stocks?")
The truth is not anywhere near as elegant as these simple conclusions make it seem. Many people use moving averages as part of their analytical toolkit, but few have a true understanding of what the moving average actually tell you. As we show in our 2016 Dow Award winning paper “Leverage for the Long-Run” (click here to download), the moving average indicator doesn’t actually tell you anything about trend. If it did, then in the 1990s, 2000s, and current period bull market (three of the strongest “uptrends” in history), a strategy of buying the S&P 500 (SPY) when above the 200 day moving average and going into Treasury Bills when below should have substantially outperformed a do-nothing approach. In fact, nothing could be further from the truth, as a simple backtest proves.
So are moving averages then completely pointless to look at? Not at all. While the reasoning often referenced for following the moving average is to follow the “trend” (false), the moving average does help with risk mitigation (true). When trading above a moving average, an investment’s volatility tends on average to be lower than when below it.
Why does volatility matter? Because for the vast majority of investors, buy and hold is a fallacy. Volatility and fast moving declines in markets tend to scare money out of markets, causing drawdowns and loss of capital. Volatility management is crucial because it is volatility that causes emotional selling, which more often than not happens at the exact wrong time. (Related: read "Volatility's Impact on Market Returns.")
Your ability to stick to a strategy matters more than the strategy itself. To the extent that moving averages can help lessen that potential volatility in your portfolio, the truth is you should focus on it. Just understand first and foremost what the moving average tells you first.
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Building a Trading Plan
The key to becoming a successful forex trader is developing a sound forex trading plan and using it on a daily basis. One must remember that a trading strategy that may be working well for one person might not do the same for you. This is because everybody has a different style of thinking, risk tolerance levels and market experience. It is always better to develop one’s own personalized trading plan and modify it as your experience grows.
So, a trading plan should define a few things;
what trading strategies you are usingwhat pairs/instruments you are tradingwhat are your risk tolerance levels
The first thing it should mention is what strategies you are using. So if you are trading pin bars or engulfing bars off key support and resistance levels, then it should state this in your plan. If you find yourself trading something else like inside bars, then you know you are deviating from your plan.
The next thing it should state is what instruments you are trading. For example, you may be only focusing on the EUR/USD, or perhaps the EUR/USD and GBP/USD. Make sure to state this in your plan.
Lastly, you want to have your risk tolerance levels clearly stated. This is not just % risk per trade, but also per session and per month. This way if you ever go over these parameters, you stop trading for the month and take a break as something is clearly not working.
But the key is to have these clearly defined ahead of time.
Make sure that you maintain a trading journal which has logs of all your trades. This is important because it allows you to analyze your trades and the success of the plan adopted by you. It should include the entry date, entry price, exit price, stop, limit, total profit/loss, and final notes which are your personal notes on each trade.I also suggest taking screenshots of every single trade you take, and color coding them based on it being a win or a loss. Then at the end of the trading week, reviewing your trades to see how you did, what mistakes you made, and what you can improve/focus on for next week.The plan can have a checklist of what you are looking for in the market before you decide to enter a trade. A list of such prerequisites helps to keep you trading with discipline and avoid any careless moves.
The creation of a trading plan is highly useful as it reduces the possibility of bad or irrational decisions based on emotions. The outlining of a plan for every potential market action will help you minimize such decisions and thus your losses. The key to disciplined and objective forex trading is to establish a trading plan and stick to it.