Jumping Into A Trending Market

How many times have you heard "The trend is your friend"

? It's certainly a true statement and your best trades will always be when you are trading the Trend.

But how do you enter the market when it is trending? Do you just look at a chart and tell yourself that since the market is up I should jump in now at the current price or do you wait and try to buy on the pullback? If so, how much of a pullback should you wait for? Do you just look at Fibonacci retracements, a 50% level pullback of the last minor or major trend, or wait for the price to come down and hit the trendline again and then buy. Wow, all these questions deserve an answer and I'll try my best to answer in a straightforward and honest way.

So here is my straightforward and honest answer; there is no "best way". The "best way" depends on your trading style. Are you a long term investor or a short term trader? For a long term trader it might not be as important to wait for the pullback as it would be for a short term trader where just a couple of points could mean the difference in a 10% return or a 100% return on the trade.

Now that I've told you that there is no "best way", I want to tell you what I am 100% certain of; trading plans.

You must come up with a specific set of rules that you have tested time and time again that work more often than not and then stick to those rules on every trade you make. You should never just try something different to see if it works because the markets are very unforgiving when you do stupid things. Leave the "trying something different" to papertrading as it's much less painful when you are wrong.

When I look at jumping into a trending market there are several things that I personally look for and I will share these with you. Let's assume the market is in an uptrend in this case.

1. Is the market really trending up or is it just a retracement of the downtrend? Remember that an uptrend must have a series of higher highs and higher lows. The key word here is series which of course is more than just one.

2. Something else that I like to do is draw a trend line. There must be at least three hits for me to classify it as a valid trendline.

3. I'm a big believer in 50% internal retracements. This is not just the major 50% retracement but minor 50% retracements also. I call these minor retracements "internal 50% retracements".

4. Look for a prior support level as prices will often bounce off these areas and head back up.

5. I use two indicators all the time, MACD and Slow Stochastics. I will not buy into a market if these indicators show that the market is overbought. You might have an indicator or a set of indicators that you like better and that's fine. Just stick with them on all your trades.

Of course these are my basic rules. It doesn't mean that they should be your rules. I share these with you just to give you an idea of how I set up my own rules. I can tell you that they work well for me but of course you must try them out and see how they work for you. I would of course suggest you paper trade them first before trying them with real money. Gecko software works well for this as it allows you to play the chart backwards in time, test something and advance the charts one day at a time to show you how you would have done in "real time".

by: David Duty

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