The Trend Is Your Friend

  • October 2, 2002
  • Steven Wang


I started trading about two years ago
and often heard the old Wall Street quote: “The trend is your
friend.” I only realized its relevance the moment I started trading pullbacks.
When trading this setup I use ADX, moving averages and eyeball charts to find
trending stocks and pullbacks.

My setup criteria:

  • The ADX must rise
    and be greater then 25

  • I use the 100-day
    EMA and 20-day EMA moving average — the 100-day moving average represents the
    long term trend (5 times the 20-day EMA)

  • Review price bars
    to further qualify the trend

     

I run a daily scan
on Stockcharts.com to find candidates for my pullbacks. On Sept. 11,
Canadian National Rail
(
CNI |
Quote |
Chart |
News |
PowerRating) showed up in my scan. The company’s stock was in a downtrend since
August 10. ADX is in an uptrend and has a reading of about 40, indicating a
strong trend. The price is below the 20- and 100-day moving average and the
averages are trending down. Other trend qualifiers are the expanded bars and
down gaps.

  

On Sept. 8, the
stock started a pullback hitting the 20-day moving average on Sept. 11,
resulting in a Holy Grail setup (Connors/Raschke). Placed an entry on Sept. 12
below the previous day low and a initial protective stop one tick above the
20-day moving average. The following days, the stocks retraces smoothly to the
Sept. 7 swing low and I covered my short on Sept. 26. It is a simple but
effective trading strategy. I am no rocket scientist so this is a strategy
suits me just fine.   


Steven Wang
follows the US markets from Singapore, where he lives. He works in the IT
industry and has been trading part-time for about two years. His style is swing
trading and he holds positions from a few days to a week.