Trend Trading the Dow Jones

Feb 19, 2009: 2:10 PM CST

We’ve heard dozens of times how “The Trend is Your Friend” but let’s take a moment to look at the chart in as simple terms as possible and reflect on why that one statment is so important to trading success.

Adam Hewison released an educational video entitled “The Trend is Your Friend – Dow Jones” that walks us through monthly and weekly charts of the Dow Jones and overlays them with their “Trade Triangle” Signals to describe why incorporating higher timeframes is important for overall analysis, and how confirming trend signals can give you higher probability, simplified trade entries.  He also explains how to filter out signals using their methodology (and one you can use for yourself) based on larger price trends (structures).

For now, let’s take a visual look at the Dow Jones Monthly Index:

Dow Jones

If we think of the “Trend” as higher swing highs and higher swing lows (for an uptrend), then that is one of the easiest and most effective methods for classifying “Trend.”  If we overlay simple moving average analysis (as in whether price is above or beneath key averages, and fine-tune that by looking at how the moving averages relate to each other), then we get a more sophisticated method of “Trend.”

However you do it, I believe it is critical to assess the broader and then shorter-term “Trend” for any stock or market you are trading – it often tilts the odds in your favor, as the more powerful short-term swings often occur IN the direction of the larger/higher time frame trend.

It’s also generally safer – particularly for new traders – to bet WITH the trend rather than betting AGAINST it by trying to play divergences, reversal patterns or other methods of calling tops/bottoms.

Corey Rosenbloom
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