One of the hardest things for most, maybe all traders, is to stick with a trade that is trending in the direction they expected. The answer to that dilemma is to find and utilize a method for determining when a trade has stopped trending. Let’s explore a few possibilities in this post.
Below is my standard setup on the daily chart. The stock is Antero (symbol AR) which is currently in a nice uptrend. If you’ve read any of my other blog posts or you follow me on X you know I make extensive use of a strategy that I refer to as DH’ing a trade to reduce risk but the longer I can hold a trade without doing anything the more potential profit that is available. What is the best method to not hedge or exit a trending trade too early? I don’t like a chart with too many lines on it because the study chaos often hides a clean trend. Each of the studies on the chart below works in different situations but rarely do I have them all activated at the same time. Let’s start simplifying the chart to expose the trend!
I’ve hidden the VWAP stop and the daily HB (Half-Back) line on the chart below. The Simple Moving Average (1) high and low will be shown on all of the charts below as that study simply prints the high and low price of every candle on the chart.
How about just showing the prior week’s HB? That stair-stepping up is typical of an uptrending chart but I’d like something that allows me to stick only with the very strongest uptrend without allowing for a larger pullback.
On the chart below is the 8SMA upper and lower bands. They are the 8SMA (simple moving average) of the high and low prices of the 8 prior candles. I’ve been asked many times why I use the 8SMA and the answer is simply that it just works better, in my trading, then any other moving average study. When price is above the rising upper band the trend is strong and when price pulls back to the rising lower band that is good location to add a long (bullish) trade. Clearly price has been in a very strong uptrend but the most recent candle is indicating that strong trend may be changing since that’s the first candle in this uptrend to close back inside the bands. If I wanted to remain in only the strongest uptrend then I would’ve reduced risk or even exited the trade at the close of that daily candle.
There’s nothing magic about the 8SMA or any other moving average. I use them to frame the price action to help me visualize the price action! To help with that point, on the chart below I’ve changed from the 8SMA bands to the 5SMA bands. That’s a more aggressive trend following strategy that would indicate when a trend is potentially changing. You can see that, even in a strong uptrend, price spends some time inside the bands but doesn’t close or even drop below the rising lower band. Could you then say that “IF price remains above the 5SMA rising lower band THEN there is no reason to hedge or exit a long Delta position”?
Now, again, I like to make charts as simple and uncluttered as possible. So let’s say, in an uptrend, what really matters is the lower band since that’s the moving average of the prior candle’s lows. Even in a strong uptrend price doesn’t always make higher highs but it typically makes higher lows. Below is the 5SMA lower band. Easy to visualize the trend. Couldn’t be simpler to monitor the uptrend, yes?
In the final chart below I’m showing the 3SMA lower band. This would be for any trader who says “I want out of a trending trade at the first potential sign of any weakness”! You can see the results of that strategy.
Added a daily chart of the energy ETF (symbol: XLE) with the more aggressive trend following 3SMA bands. How do you think that’s been working out?
So that’s it for today’s post. Give me some feedback below on whether or not you found this helpful or any suggestions on how to improve the trend following strategy.