How To Become A Trend Trader and Why You Should Use More Monthly Charts
It takes years of practice and studying to finally craft a trading style that fits you perfectly. Today, we want you to meet @ZenTrends for that exact reason. He has crafted a trading style that’s beginning to gain a significant following on StockTwits. You may have seen his charts before. They are crisp and clean observations about specific stocks.
We recently reached out to him and asked him a few questions about his technique. What follows is an incredibly in-depth talk about what he does and what he’s learned:
1. Would you like to buy high and sell higher or try to bottom fish a stock? Why?
Buy high, sell higher. I prefer to pay up for a stock for several reasons. Generally speaking good merchandise costs more. If the stock is moving higher consistently it means the underlying company is doing something right. The price of the stock will tell you quite a bit about the company’s fundamentals and competitive advantage. If the shares are trading higher it most often means the company is growing and has a strong financial position. Momentum is always helpful to have at your back when trading as well.
A stock moving higher tends to continue to move higher as the “fear of missing out” grows, Shorts become trapped and have to cover, etc. It’s easier to row with the current rather than against it. I tend to give the market the benefit of the doubt, meaning if a stock is trading higher, forces larger than me are suggesting something good is happening. When trying to bottom fish a stock in a falling trend you are betting that the market is wrong and that you know more than the market. I try to never make that assumption.
2. You seem to have a great understanding of trends and momentum (mostly just by looking at charts, too). What exactly are you looking for?
At the most basic level I’m looking for stocks that are generally performing well. This game is hard enough, why make it harder than it needs to be? The first thing I need to see, regardless of timeframe, is higher lows. Higher lows tell me buyers are becoming stronger and more supportive of higher prices. Every time the stock pulls back new buyers are growing more anxious that they will miss the next move. Momentum is turning and they can sense that. When I buy into a trend I’m not looking to dive in after a sharp spike in the price or after a swift drop. I prefer order in the price movement. I’m always looking for a stock that is making higher lows AND forming an orderly sideways channel. The sideways consolidation tells me supply of the stock is tight and that the prior trend is simply resting rather than reversing. This is where “buying higher” comes in.
Once the stock has cooled off by trading sideways for a period of time, I want to see some conviction that the prior trend is ready to resume higher. I always wait for a breakout higher above the sideways range. The breakout says buyers are ready for higher prices and momentum is kicking in for another leg up. Sure we could get a better entry price if we bought right into the consolidation, but we also don’t know if the stock will continue to go nowhere for an extended period of time. When a stock consolidates it can do one of three things: continue to chop sideways, break out lower, or break out higher. The only scenario that pays us is when the stock breaks higher, so I wait for the signal.
3. You are unique in the sense that you use monthly charts a lot. What do you see in monthly charts that daily or hourly are missing?
Quite simply, Monthly charts are where the BIG moves come from. Good luck catching a 10 bagger w/ a Daily or Hourly chart trend. Even if you don’t trade on a Monthly timeframe, this is the “big picture” trend. The long-term gives you the true direction of the stock you are trading. When traders discuss being in alignment with the larger trend, this is what it means. I’m also a believer that due to a higher concentration by market participants, media, etc on the Daily movement of stocks there are more shakeouts on the lower timeframes. Shorter timeframes offer many more “false moves” that are designed to trigger fear in nervous traders, encouraging them to sell out of perfectly good positions. In this game you have to be willing to do what most will not.
The majority of traders are too impatient, fearful, and reactionary to sit with a winning holding through very normal gyrations in a stock’s’ movement. Most want instant gratification and are unable to let a move come to fruition. This is why I feel most fail in the markets; traders cannot stand to see an open profit disappear so they get shaken out on the slightest of wiggles. When it comes to catching the real moves, the moves that substantially alter your long-term returns, often being able to hold a stock for multiple years is required. Also with so much focus on “high frequency trading”, becoming a “low frequency trader” can help combat that key aspect of new-age market manipulation. This isn’t to say that you can’t make money on a shorter-term timeframe. I think having a portion of your equity for trading short-term moves can be a great addition to long-term core positions. But as far as catching the real whoppers, zooming out the timeframe is really the only way to do it.
4. Let’s say I put a chart in front of you and give you the choice to pick one technical indicator (Moving Average, Fibs, etc) what would you pick?
The one indicator I would choose would be a Simple Moving Average. A moving average is a direct representation of price but in a more smooth form. Many indicators often conflict or a give a different slant on the overall price action, I like to stay as true to price as possible in my analysis. A moving average simply shows the underlying trend in a smoother, less noisy way. Price is always my primary indicator as that is what ultimately pays me. If I want to extrapolate more information away from price I want that indicator to be as closely represented by the price in question.
I find moving averages helpful as they tell me which way to approach a certain market. If the M.A.’s are sloping higher underneath price I know the trend is higher and I want to trade that market Long. If the M.A.’s are moving lower and above price I know the trend is down and I want to sell or short that market. It’s very beneficial to my P&L when I stick with the general direction of the major moving averages. Personally I prefer the 20 period SMA. I find it to be relevant as an indicator of intermediate trend where it reacts slow enough to keep you in a strong uptrend/downtrend, but also reacts fast enough to alert you when a trend is turning against your position.
5. How did you discover your own style of trading? What was the journey?
I started like I assume most did. I was a general Business major in college, learning the more traditional methods: fundamental analysis, macroeconomics, etc. I was in school while the mid- 2000 housing bull market was rolling. Once I graduated in 2006 I began running my family’s business (non-market related). When the 2008 bear market came on and I knew traditional analysis of stocks wouldn’t protect me and my family from whatever “That” was that had just occurred. I began to seek alternative methods to my fundamental background. I started looking at charts sort of aimlessly and reading basic technical analysis information on the internet. There were a few methods I tried but I didn’t have much of a plan besides try to buy at support and sell at resistance. After some months of struggling on my own I followed a couple services that promised rewards based on their “proprietary” methods. Needless to say, those flopped.
It was then that I discovered “The Kirk Report”. Charles Kirk is a well-known trader and teacher who offered an educational based service. He taught me the importance of investing with a stock already moving in the direction I wanted to go; trade with the trend, not against it. I learned a lot about having a consistent process and not fighting the market from Charles. I am a member of his report still. From there I began reading what I could about trend and Relative Strength: “Trend Following” by Michael Covel, “How to Make Money in Stocks” by William O’Neil, “How I Made 2-Million in the Stock Market” by Nicholas Darvas. I found how little fundamental research directly correlated to my investment returns. Fundamental analysis has its place in my process but it’s more of a filter in the initial identification of a stock, not a guiding factor. It tends to make me more biased toward a stock. The “story” caused me to be less objective and prone to holding a declining stock too long.
Price is the most objective way to address the market. The price action is what determines my bias (how the market is actually moving rather than how I think it should move). Once I discovered that the market is designed to exploit my emotions, the process of removing emotional bias as much as possible from my trade decisions was imperative. It will never be removed completely and there is some discretion in choosing ultimately what to buy, but developing rules that keep me aligned with the market action and less emotional was my “ah ha” moment. That moment was in 2011 and I haven’t underperformed the SP500 since. Follow price, follow trend, and try not to think too much. That’s the Zen Trends method in a nutshell.
If you enjoyed this talk please let @ZenTrends know! The comments section below is open for discussion and make sure you also sign-up for our daily email on the right side of this page.
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