Trend Trading – Top 3 Ways to Confirm a Healthy Sideways Trend Consolidation-Pt2
In part one I explained the importance of a strong trend and the popularity of trend trading systems. The biggest question remains; how do you know the strength of the trend and will that trend continue?
There are three things you can use to help you determine whether you are in a healthy trend consolidation or a weakening trend breakdown.
1. Price is in a Narrow or Sideways Base
The first thing you want to look for is a narrow or sideways base. This looks more controlled than a very whippy topping phase. During a topping phase, traders are uncertain of the future direction so the stock is going to move much more erratically and is going to be much more volatile.
2. Decreased Trading Volume During the Base
The second point is a decrease in volume during the base. During a pause, volume slows as the stock loses its momentum to take a break. This mild hibernation allows the stock to regroup before the next leg to the upside. If price is smooth, controlled and calm. It’s telling you “there’s nothing really happening here”. It’s almost like the stock is in a little coma or a mild hibernation. The volume is extremely light and price is just taking a break.
3. Look for Rising Moving Averages
Lastly, we want to look rising major 20 and 40 period moving averages. A strong trend is going to pause allowing the moving averages to catch up so another up move can be made. During long consolidations, the averages are going to flatten. During a topping phase, the averages are going to reflect the whippy prices by continually crossing over each other. With whippy prices the averages are going to be lagging behind trying to catch up.
With all three of these factors present you may have an ideal consolidation or pause in a trend. If price breaks above the base, you have a breakout play and if there’s volume behind that move, you have a very good breakout setup.
You can look to enter above that consolidation base. If you miss the move don’t chase the stock, wait for the first pullback. The first major pullback offers you the first opportunity to get in again, which is usually near the 20 period moving average.
Don’t forget to have a plan before entering the trade. You should know ahead of time what your stop loss is, what your profit targets are and how much you will be risking on the trade.
In this final segment of the trend trading series, I’m going to go over some final thoughts and the three key points that will keep help you manage the trending stocks you’re trading.