Is The Trend Important?
By Cliff Clark
Do you consider the trend a stock is currently in when considering a trade entry? I know I do and I have a rule in my trading plan to make sure I don't forget to consider the trend. It's the first thing I look at.
Here is the rule. Only buy stocks that are in up trends on the time frame you’re trading (or down trends for a short). Why is this rule so important? It’s all about the expectations. When a stock is in an uptrend, the expectation is for higher pivot highs and higher pivot lows . When a stock is in a sideways trend, the expectation is for equal pivot highs and equal pivot lows. When a stock is in a downtrend, the expectation is for lower pivot highs and lower pivot lows. So if you buy three stocks one for each case which one of the trades has the greatest potential to work? The up trending one does because once it reaches the prior pivot high, it is the only one where the expectations can justify the the probability for higher prices. So in theory, although any stock can go up, the one in an uptrend can go farther. It’s expected to do so, while the one in a sideways trend is expected to stop at the prior pivot high and reverse, and the one in a downtrend is expected not to even make it to the prior pivot high!
Simple right? Make it easy on yourself. Trade with the trend, stick with the old saying, “The Trend is your Friend!”, because it really is.
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
