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One of the oldest clichés in the market is that you must trade with the trend. This might seem like a very obvious statement and one which all investors pay lip service to; however upon review, how many times is this particular axiom ignored? The answer is probably, ‘too often’. Trading with the trend is not simply a case of looking at a chart, drawing a few lines and then taking a position. This myopic view can lead to poor decisions and financial losses. Rather, a trend following approach is dependent upon the particular time frame within which the trader is working and one which should not be viewed in isolation. Wherever possible, multiple time frames should be examined. A trader using a daily chart should look at 3 day or weekly charts for information on the prevailing mood in the market, for example. Equally, a trader using a 1 minute chart may refer to 5 minute and 10 minute time frames in order to understand the direction the market is heading.
The chart below shows the stock Loews (L:NYSE) and its recent trading pattern. As a very simple ‘general’ trend identifier, a 10 day new high and 10 day new low filter has been added. A trader looking to work on an intraday time frame (for example a 15 minute chart) could use this big picture analysis to determine whether or not a long or short bias should be brought to bear. The purple bars represent those days where new highs have been made and the blue bars represent those days when new lows have been made. The chart has then been divided into Bull and Bear periods illustrated by green and red rectangles based upon these new highs/lows.
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Clearly, between September and today’s date any individual trading Loews would have a long bias and could use a smaller time frame to find suitable opportunities. Of course, the market sentiment could change and, during the periods of transition from bull to bear markets (and back again) losing trades will inevitably be taken. The only protection from this comes with ‘normal’ risk management and stop strategies.
Below is a 15 minute chart from a (soon to be released) version of ProfitSource. Although this is currently in the testing phase, Elliott Wave has been added to the intraday charting capabilities.
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Using the methods taught in the TradingKey course, a ‘plain vanilla’ EW trade can be taken. Elliott Theory and the fractal nature of the waves mean that these methods will work regardless of the time frame and can be utilised just as easily on a 5 minute chart as they can on a 5 year chart! In this example, the sympathetic nature of the longer term (daily trend) merely acts as an additional filter for the short term (15 minute) trading set up. It’s the basic element of ‘the trend is your friend’ mixed with a more technical approach to the market through Elliott Wave.
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As can be seen from the most recent chart, depending on the method of progressive stop employed a fairly significant profit could have been made in a very short time. It goes to show, old trader’s sayings like old traders themselves stand the test of time for a reason.
Stay Sharp,
John Jeffery
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