How to Day Trade with Trend
In this article, I will discuss How to Day Trade with Trend in detail. Please read our previous article discussing How to Trade with the Supply and Demand Zone. As part of this article, we are going to discuss the following pointers, which are related to How to Day Trade with Trend.
- Why is trend analysis required for day trading?
- Structure of the market in detail
- How do trade with uptrend, downtrend, and sideways markets?
- Characteristics of each trend
- How do we analyze each trend?
- When does the trend end?
I WOULD SUGGEST GO THROUGH THE Price Action Analysis article BEFORE GOING FORWARD.
Why Trend Analysis for Day Trading?
Trading against the trend, without a trend, or poor quality trends are among the most common reasons for trade failure. The quality or strong trends have more predictable success (edge).
The controlled arrangement of price bars and pullbacks provides greater certainty that reverses in supply and demand happen. Poor or weak trends have lower predictability. Uncontrolled arrangement of price bars and pullbacks into supply and demand lessens the chances of a reversal.
STRUCTURE OF MARKET OF MARKET
The price goes through 4 Phases
- ACCUMULATION (sideways market)
- UPTREND(trending up)
- DISTRIBUTION (sideways market)
- DOWNTREND (trending down)
ACCUMULATION (SIDEWAYS MARKET)
Smart money is removed from the floating supply of stock by buying, and this process is called accumulation. The accumulation phase looks like a range market after an extended downtrend.
A market is in a range when trading between Support and Resistance. Price Stuck between Resistance and Support. Not move in any direction. Generally, in the accumulation stage, we will see
- Normal or narrow-range candle
- Both mix the green and red candle
- Low volume
- Take more time
- Price in a tight range
As time goes by, stops will gradually build up beyond the range as traders long near the lows and short near the highs of the range.
No guarantee that the market will reverse from here. But it should alert you to the possibility that the bears are getting weak and the bulls could take control and push the price higher above the highs of the range
How to Enter the Accumulation
3 TYPES OF ENTRY FROM ACCUMULATION
- Spring entry
- Break out entry
- Break out pullback(flat or test ) entry
If the lows of the range coincide with Support on the higher timeframe, it greatly increases the odds of the market breaking out higher. Let me explain: the big picture is bullish, but the lower time frame has a downtrend, and the lower time frame trend stops at a higher timeframe resistance. Let me explain to you.
UPDATED DAILY CHART
This means you wait for the price to come to an area of Support daily and then look for the break of accumulation on your trading timeframe.
Smart money is aggressively moving prices up. The advancing phase is essentially an uptrend, with prices making higher highs and lows. Market moves in up and downswing
In a healthy bull trend, the upswing generally exceeds the downswing in length and makes a higher high and higher low, and the reverse is true for the bear market
Price Make Higher High (HH) and Higher Low (HL)
Generally in the advancing stage:
- There are more bullish than bearish candles
- The bullish candles are larger than the bearish candles
- Volume increases on the upswing and decreases on the downswing
Bullish bars close to opposite extremes or at near-high
Now… the advancing stage eventually will need to “take a break” because the early buyers will start taking profits, and sellers will look to short the markets as prices are at attractive levels.
Different types of trends.
- Strong trend
- Healthy trend
- Weak trend
- In a strong uptrend, the buyers are in control with little selling pressure.
- You can expect this trend to have shallow pullbacks (flat sideways)with low-volume
- Barely retracing beyond the 20 EMA.
- A bullish wide-range bar is more than bearish.
This makes it difficult to enter on a pullback because the market hardly retraces and continues trading higher. The best way to trade this trend is on a breakout
In a healthy uptrend, the buyers are still in control with the presence of selling pressure (possibly due to traders taking profits or traders looking to take counter-trend setups).
You can expect this trend to have a decent retracement, usually towards the 20EMA, which provides an opportunity entry with the trend. Low volume pullback with narrow range or lower wick candle
Weak uptrend/choppy trend
- In a weak uptrend, buyers and sellers are almost equal control, with the buyers having a slight advantage.
- You can expect the market to have steep pullbacks and trades beyond the 20EMA.
- Generally choppy price action
- The market breaks out of the highs only to retrace back much lower (which makes it prone to false breakout). Pullbacks are often breakthrough areas of minor demand (uptrend) or minor supply (downtrend)
- The majority of open prices will be into 50% or more of the prior bar range.
- Close may not move in the direction of the previous bar
- New bar open and close not near extremes, meaning tails
- Display uncertainty
The best way to enter this trend is at Support or Resistance.
Tick by Tick: Secrets to Day Trading Success Class 2: Technical Analysis
SM will take advantage of the higher prices obtained in the rally to make profits by beginning to sell the stock back to the uninformed traders/investors.
ALL THE INFORMATION PROVIDED ABOVE IS REVERSE FOR THE DISTRIBUTION AND DECLINE PHASE
Price makes Lower High (LH) and Lower Low. (LL)
When does a trend end?
An uptrend is officially over when the stock has put in two lower highs and two lower lows in a particular time frame. A downtrend is officially over when the stock has put in two higher lows and two higher highs in a particular time frame.
Day Trade with Trend Summary:
Day trading with the trend involves identifying the general direction in which the market moves and executing trades in that same direction. The underlying idea is that it’s often easier and less risky to “go with the flow” rather than trying to predict reversals. Here’s a basic guide on how to day trade with the trend:
1. Identify the Trend:
- Price Action: Look at the highs and lows on the chart. In an uptrend, prices should be making higher highs and higher lows. In a downtrend, look for lower highs and lower lows.
- Moving Averages: Use moving averages to determine the trend. For instance, if the price is above a certain moving average (like the 50 or 100-period MA), the trend might be considered up, and vice versa for a downtrend.
- Trend Lines and Channels: Draw trend lines connecting the highs or lows. A channel can also be used to understand the strength of the trend.
- Momentum Indicators: Indicators like the MACD (Moving Average Convergence Divergence) or the ADX (Average Directional Index) can help confirm the trend’s strength.
2. Wait for a Pullback or Consolidation:
- Pullback: After you’ve identified the trend, look for the price to make a short-term move against the trend, which is a pullback. This can offer a more favorable entry point.
- Consolidation: Sometimes, instead of a pullback, the price will move sideways for a period. This consolidation can signal that the trend will continue once the price breaks out of the range.
3. Enter the Trade:
- Breakout Entry: Enter the trade when the price breaks out from the pullback or consolidation in the direction of the trend.
- Retest Entry: Wait for the price to retest a key level (like a broken resistance turning into support in an uptrend or support turning into resistance in a downtrend) before entering.
4. Set Stop Loss and Take Profit:
- Stop Loss: Place your stop loss below the recent swing low in an uptrend or above the recent swing high in a downtrend to protect yourself against the trend reversing.
- Take Profit: Set a take-profit level based on previous price levels where the price had turned around, or use a risk-reward ratio (like 2:1 or 3:1).
5. Manage the Trade:
- Trailing Stop: As the price moves in your favor, you might use a trailing stop to lock in profits if the trend suddenly reverses.
- Partial Profit: Consider taking partial profits at certain levels while letting the rest of the position ride the trend.
6. Monitor and Exit:
- Monitoring: Keep an eye on the trade and the market conditions, as news or events can quickly change the trend.
- Exit Strategy: Have a clear exit strategy. If the trend starts showing signs of reversal or if your take-profit levels are hit, exit the trade.
Additional Tips for Day Trading:
- Volume: Look for high volume on trend-continuation days and low volume on pullback days, which can confirm the trend strength.
- Time of Day: Pay attention to the time of day; often, trends can be more reliable during certain market hours.
- Backtesting: Test your strategy with historical data to refine your entry and exit points.
- Risk per Trade: Only risk a small percentage of your account on each trade, typically 1-2%.
- Daily Loss Limit: Set a daily loss limit. If you hit this limit, stop trading for the day to avoid emotional trading.
Remember, day trading involves substantial risk and the possibility of rapid financial loss. It’s crucial to practice strategies in a simulated environment and to have a thorough understanding of the markets before committing to real capital. Always stay informed and continuously educate yourself to adapt to changing market conditions.
In the next article, I will discuss Multiple Time Frame Analysis in detail. Here, in this article, I try to explain How to Day Trade with Trends in detail. I hope you enjoy this How to Day Trade with Trend article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.