Published On: Wed, Oct 31st, 2012

How to Trade the Trend with CFDs

Nearly everyone who has been trading CFDs for any length of time will have stumbled upon the sayings ‘trade with the trend’ or ‘the trend is your friend’.

But what is a trend? Is it really that easy to spot? In technical terms a trend is defined as a period of sustained higher highs and higher lows. A trend can either be long term (more than 12 months), medium term (1-12 months) or short term (less than 1 month). In the world of short term trading a trend can even be a short as a few days.

Sometimes a trend is easy to spot, as in Fig. 10.24(a) below.

Fig. 10.24(a)

At other times one might have to use some sort of technical indicator to pick up that a trend has developed.

The Japanese indicator called Ichimoku Kinko Hyo was originally developed to pick up trends and there are few trading rooms in that country where one would not find an Ichimoku chart somewhere on the wall.

In Fig. 10.24(b) below, which is the same as that in Fig. 10.24(a) except that an Ichimoku chart has been added, the trader would have picked up that a trend was developing the moment the price emerged from the cloud at point A.

Fig. 10.24(b)

When analyzing trends, it is important to use the correct time frame in the charts. When analyzing a long term trend (12 months+) it would make no sense to use daily charts.
Rather use weekly or even monthly charts. When analyzing short term trends daily and sometimes even hourly charts are more useful.

Range-bound markets

A trend doesn’t necessarily have to develop in a bull or bear market. Often one finds that a trend develops within a channel, i.e. the price bounces off upper resistance and lower support levels.

In Fig. 10.24(d) below the blue line indicates the upper end resistance level of the channel and the red line the lower end support level.

Fig. 10.24(d)

Note that trading a channel-bound market such as the above requires a different approach than trading an up-trending or down-trending market. Whereas with an up-trending market, for example, one would wait for a pullback and then go long, with a range-bound market such as this, one waits for the price to hit the blue or the red line and to start turning back before taking the opposite trade: a short position when it bounces off the blue line and a long position when it bounces off the red line.

If the price breaks upwards through the blue line in Fig. 10.24(d) it could be the start of a bull run. The trader should wait for a confirmation signal before going long too soon though. A whipsaw at this stage could cause havoc in any trade. Wait for at least a clean break of at least one ATR above the blue line before going long.

The same is true for a break downwards through the red line. It could be the start of a new bear run, but it could also turn around again just below the line and whipsaw the trader, so give it enough time to prove itself.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.