Elements of a Successful Trading Plan--Trade With The Trend
Trading with the trend is hard to do because a logical give-up exit point will be farther away, potentially causing a larger loss if you are wrong. This is a good example of why so few traders are successful. They can't bring themselves to trade in a psychologically difficult way.
You can define the concept of trend only in relation to a particular time frame. When you determine the trend, it must be, for example, the two-week trend or the six-month trend or the hourly trend. So an important part of a trading plan is deciding what time frame to use for making these decisions.
Do you want to be a long-term trader, also called a position trader? They hold positions for weeks or months. Do you want to be a short-term trader who holds positions only for a few days? There are even very short-term traders called day traders. They watch the markets during the day and always enter and exit their positions on the same day.
While it is perhaps easier psychologically to keep the time frame short, the best results come from longer-term trading. The longer you hold a trade, the greater your profit can be.
Day trading has great attraction because you can start each day fresh and sleep comfortably every night with no open positions. However, it is the most difficult kind of trading there is. Here's how legendary trader Larry Williams describes it: "Day trading is so stressful. You're going to end up frying your brain. All the day traders I talk with are losing money. Besides, it's really hard to come up with profitable day trading systems."
For the greatest chance of success, your time frame to measure trends should be at least four weeks. Thus, you should only enter trades in the direction of the price trend for the last four weeks or more. A good example of a trend-following entry rule would be to buy whenever today's closing price is higher than the closing price of 25 market days ago, and sell whenever today's closing price is lower than the closing price of 25 market days ago.
When you trade in the direction of this long a trend, you are truly following the markets rather than predicting them. Most unsuccessful traders spend their entire careers looking for better ways to predict the markets.
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