One of the most straightforward and well-proven ways to trade is to follow trends, buying dips in uptrends and selling rallies in downtrends.
The beauty of trading in this way is that, although it can lose money in the short term, if you follow some precautions and let your winners run, it is the easiest way to make money over the long term.
There are many variations on how to decide when and where to enter in the direction of the trend.
One of the most common methods, and one that I have used myself, is to identify a dip or rally by use of a Donchian channel, e.g. if the price makes a 2-day low in an upwards trend, this is the time to start looking for a long entry.
One of the best filters to use here is to look for higher than normal volatility. You can do this easily just through the Average True Range (ATR) indicator, and checking it against the range of the possible entry candle that is rejecting the low.
However, there are a couple of obvious weaknesses in this method:
1. Using a Donchian channel with set periods is rigid and from time to time it will be out of sync with the rhythm of the market.
2. By the time you get a confirmed entry with volatility, you may have already missed out on a lot of pips.
Now, the first point could be easy to fix, as you could adjust the look-back period of the Donchian channel from time to time. The second point however is very problematic.
An alternative might be to simply pick areas of probably support in an uptrend, and set limit orders for long entries right on the support level. The stop loss can be volatility derived from the Average True Range indicator. Could this work?
As far as I am concerned, I need to undertake more research on it, but my initial investigations have found that using this method can keep you out of several losing trades, while still capturing the big winners, improving overall profitability.
Where this method fails is in a very strong, runaway trend. However, there is no reason why you couldn’t simply become more or less aggressive in picking likely support levels according to the strength of the trend.
Of course, you must have the skill to pick good support or resistance levels in a trend. This is a topic I will return to soon.
Overall, I am coming to believe that the best trend trading entry method is placing limit orders at probable support levels.
