I believe that everybody heard such a saying as “the trend is my friend”. Many of us also had met in Internet and books different opinions as to the sence of this saying.
Well, what is the real meaning of it afterall?
The real meaning and idea of the saying is a simple and clear demand: Trade in the direction of the trend and ignore trading signals directed against the current trend.
Friendly trend would remain friendly, while trader treats him like a friend , not doing something against the desire and will of the his friend/trend. Do you know friends who would not be disturbed by your doings against their desire, understanding and will ?
Nobody likes such things.
But nevertheless, many of us starting examining charts absolutely forget this simple and clear rule and start trying to catch the high or low peaks or to trade against the trend. This means, that the trader lacks main thing – dicipline. It is interesting, that the looser, while considering and investigating his own mistakes, often even does not see his main mistake – trading against the trend.
How the trend could be defined ? Very simple – with the help of combination of four Simple Moving Averages (MA). For example, let us take combination of 5/20/40/60 МА.
Usually current trend is defined by looking at Daily chart and this is right. But the traders with small cash amounts may define trend at 4-hour chart and 1-hour chart. It often happens that in the interests of relatively quick trading the trend may be defined using only 1-hour chart. But we should not forget about the Daily chart, because if the hourly signal coincides with the daily trend, then there appears a brilliant possibility for a mighty movement along the trend.
But let us return to the above mentioned combination of MAs. So, if МА 40 is above МА60, then the trend is upward and each time when MA5 crosses MA20 upward (that is in compliance with the trend direction), we enter the market. But when MA5 crosses MA20 downward, we use this signal only for closing of previously opened positions.
And vice versa, if МА40 is under МА60, then the trend is downward and now we enter the market only when MA5 crosses MA20 downward, and we use upward crosses of MA5 and MA20 only for closing opened earlier positions.