2. Spot the Trend and Go With It Determine the trend and follow it. Market trends come in many sizes: long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.
Matt Bradbard: You’ve heard “the trend is your friend”, now apply it.
3. Find the Low and High of It Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."
Matt Bradbard: This helps a lot with stop placement and buying or selling breakouts.
4. Know How Far to Backtrack Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A 50% retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38.2% and 61.8% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
Matt Bradbard: If you’re not already watching Fibonacci retracements as part of your trading…start. In fact, go back and look at past trades and insert Fibonacci levels and see how much easier the trades could have been had you used this type of analysis.
5. Draw the Line Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.
Matt Bradbard: Knowing whether or not you are above/ below support and resistance levels helps with stop placement.
6. Follow that Average Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if the existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. The shorter average line crossing the longer is a key signal. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.
Matt Bradbard: Some averages work better depending on the market and time frame but for position trades, the 40-, 100-, and 200-day moving averages are critical as those are usually what the “big boys” follow.