Basic Trading Methodologies - Method 4 Simple Trend Trading
Simple Trend Trading / Adaptations of the Triple Screen Approach
The basic trading method we will highlight on this page is also one of the most common and popular methods of trading using technical analysis. It is a basic trend following method
that attempts to join long term trends on temporary weakness. Many many traders have discussed such an idea however Alexander Elder was probably one of the
first to describe a method in a well known book (Trading for a Living by Alexander Elder). Since then it has been adapted in a variety of ways
to create succesful methods.
The following is a simple overview of the strategy only - it is not to be taken as advice or a recommendation.
While we believe the basic strategy is a good start we also feel it needs at least a slight modification to what we show below in order to be consistently succesful. We cover how we use the strategy in our newsletter.
The following chart shows an example of a succesful trade using this idea.
So then what is the basic trading method?
Step 1 - Determine the Long Term Trend
The first step of this method is to determine the long term trend - this method is about trading with the long term trend - as such we need to define it.
In most cases (such as in Elders Triple Screen Approach and adaptions of this) it is suggested
that the trader use a weekly chart to determine the long term trend. In order to keep it mechanical many traders will choose to use a trend following
indicator such as a moving average, the MACD, the ADX group or any other trend following tool they deem to be best.
The following diagram shows the Weekly Chart for the example above PRIOR to the point of entry. We can see that using a weekly chart to determine the long term trend. In order to keep it mechanical many traders will choose to use a trend following
indicator such as a moving averages, or an MACD that an
uptrend is defined on the weekly chart. After such a strong run almost all indicators would suggest a trend was in place.
Step 2 - Watch for a pullback on the daily chart
While it is correct that you can buy high and sell higher, most trend traders prefer not to try and get in to a trend when it is overheated or has been
rallying for an extended period. They prefer to buy on a pullback and temporary weakness as this gives them a better entry price and thus a higher risk reward.
The basic idea is to use what technical analysts call an oscillator or some other indicator that will allow us to define a pullback in the price.
Elder originally suggested the stochastic oscillator was a useful tool for this and other traders have suggested things such as the RSI which we have found
useful. This tool is used on the daily chart this time.
The following chart shows an example of this and we have used the stochastic oscillator in order to keep things simple. This may or may not be the
best tool for this type of method.
We can see in the above diagram the Stochastic Oscillator is below the 20 level which is often termed "oversold". We personally hate this term and do not use it in the
actual newsletter as we do not feel it is accurate. We use it here as it is commonly accepted and understood.
The major point is that there is a pullback in price. This does not mean it is time to go long using this type of method as we need to see
some buying activity returning. The stock could be on its way down to $1.00 for all we know at this point. The benefit of having indicators is that it helps to keep things less subjective and makes it easy
to search for and locate candidates that are at this point of development.
Step 3 - Look for Confirmation of a turnaround and resumption of trend
Once a suitable trading candidate is in this position traders look for the uptrend to resume once again. This can be done by using indicators
or by simply viewing price action. Elder suggested the use the intraday chart to signal and entry in to a stock and as such he termed his
method "Triple Screen - i.e. Weekly, Daily and Intraday". I personally tend to trade of end of day data when using this type of approach.
In the following chart we simply use a candlestick pattern to signal a reversal for this example. In the newsletter we discuss the actual methods we use for each of these
steps.
Managing the Trades
Obviously without the correct management strategies no method can be expected to work and be profitable. We cover the full management details within
our newsletter. As a basic guide however most traders use a profit protection tool such as a stop loss and many attempt to take profits
if the stock is overheated and offering an adequate profit. We cover all of these methods in our newsletter however some of the possible profit taking
points are illustrated below:
The above is an example of the types of strategies we cover in our newsletter the StarTrader Report. It is an overview only and is not a detailed
strategy and is not suitable for trading without modification. For full details on how we use this in our trading see our newsletter
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