By Imre Gams, Editor, Money Trends There are many kinds of trading approaches when it comes to the markets. But I’m not interested in the “right” or “wrong” way to trade. I’m interested in what works best for me. Just as you should be interested in what works best for you. Now, for me, it doesn’t matter what kind of analysis I’m using – whether it’s fundamental, quantitative, market sentiment-based, or technical. I like to trade in the direction of the larger trend. In this article, I’ll show you two of my favorite tools for trend-trading, and how to use them. Let’s get started… Two Great Tools for Trend-Trading The two tools I’m talking about are the Donchian Channel, and the Moving Average Convergence Divergence (MACD) indicator. The Donchian Channel is a fantastic trend-following indicator. The MACD, on the other hand, is great at letting you know about possible shifts in trend. I drew up two charts, so you can see these indicators in action. First, look at this weekly timeframe chart of Coffee Futures, going back to 2009-2014… On this chart, I have our Donchian Channel in green. The green channel is split up into three lines: an upper line, a middle line, and a bottom line. The MACD indicator is on the bottom of the price chart. It’s made up of the MACD histogram (red and blue bars) and the MACD moving averages (black lines). Let’s take a closer look at what this chart is telling us. First, see the vertical blue line I added above. It shows where the uptrend ends, and the downtrend starts. Notice how in an uptrend, price tends to hug the upper line of the green channel. And it uses the middle line as support. In a downtrend, it’s the opposite. Price will ride the bottom line and use the middle line as resistance. Also notice how the MACD moving averages are crossed up over each other. They remain crossed up during the uptrend phase. During the downtrend phase, they cross down and remain crossed down. Finally, take a close look at the price action near the vertical blue line. See how it’s messy and spikes above the middle line of the Donchian channel? This is typical as one trend exhausts itself and a new trend is about to begin. What This Means So what does that mean for traders? I like to look for short-selling opportunities in a bear market when prices rise off the lower channel line and bounce off the middle line. And I like to look for buying opportunities in a bull market when prices fall off the upper channel line and find support off the middle line. In our example above, coffee was in a bull market that exhausted itself and turned into a bear market. So I would’ve looked for buying opportunities during the month of May in 2011. Once the MACD crossed down, and the price action stopped respecting the middle line of the Donchian channel as support, I would have switched to being short the market. Even if I didn’t time the exact top, that’s okay. I’m interested in capturing the meat of the move. Notice how the MACD remained crossed down until May 2012, representing plenty of opportunities to short. This is an incredibly important lesson. Many traders I’ve worked with over the years believe you’re getting in late if you don’t catch the very beginning of a major move. They also think you’re exiting too early if you don’t cover your trade the moment the market begins to turn again. I call this the “perfection paradox.” While you will call a bottom or top tick once in a while, if you try and pick tops and bottoms consistently, it’ll be a very expensive lesson to learn. Good trading isn’t trying to pick the very top tick and getting out at the very bottom. Good trading is about banking consistent gains over time using a reliable and proven strategy. What Our Two Tools Are Saying Now So, now that you understand how two of my favorite trend-trading tools work, let’s look at a more recent price chart. We’ll see if these technical indicators are aligning… Here, we have a price chart of Kansas City Southern (KSU), a transportation holding company. After a steep sell-off in March, the stock began to recover. It put in higher highs and higher lows. This is very important. It tells us we might have a new uptrend in the making. Now, the price action has been a bit rocky. You can see violations of the middle line of the green channel quite frequently. I’ve marked them with red arrows. But more recently, the MACD crossed back upwards. And as recently as last Friday, we found strong support on the middle line of the Donchian channel. What does this tell us? It tells us that KSU may have much more upside in the near future. But I wouldn’t rush into the market simply because the MACD has crossed up… As a trend trader, you want to buy dips in an uptrend and sell rallies in a downtrend. So traders should wait for price to pull back to the middle line. I believe there’ll be a great entry opportunity there. Regards, Imre Gams Editor, Money Trends Like what you’re reading? Send your thoughts to feedback@andykriegertrading.com. READER MAILBAG Mixed responses from readers, after we wrote about a looming correction for gold and silver (catch up here and here)… I would like to see you put up a large sum of fiat currency to go short silver and get run over by being on the wrong side of the trade! Silver will have pullbacks at resistance, sure, but it’s far better than worthless fiat currencies being created by the trillions by corrupt central banks! – James F. About the gold correction essay, thanks. I am hedging my bets, too. If the indexes correct in the next week, the gold rally will persist, but an inevitable retreat to $1,700-$1,750 seems more likely. I think it will crest at $2,100 in the event of a downturn in the Dow Jones and S&P 500. – Daniel H. I see no reasons for a correction, nothing that signals a Sell, but let's wait and see. My Keynesian education argues for gold and silver to climb. Silver to $30, gold to $2,500. – Michael H. Do you think gold and silver will continue to climb, like Michael says? Or are you hedging your bets against the two metals, like Daniel? Write us at feedback@andykriegertrading.com. |