Stock Option

•  The single most important rule: Trade with the trend. This is
the most frequently stated but most commonly misunderstood
and overlooked aspect of successful speculation. Determining
the major trend is not an especially difficult task, even for the
novice SSF trader. Professional traders should find this step
simple to implement consistently.

•  Assuming you have determined the major trend of prices and
assuming that the trend is up, the next step would be to draw
support lines under the market.

•  Extend the trend lines into the future.

•  Determine the intersection point of trend line and price for
the next market period (i.e., day, hour, etc.) Enter your price
order slightly above the support line. I suggest a little leeway
in order entry as many other traders will probably be entering
their orders at or about the trend line price.

•  A good rule regarding stop losses: Liquidate your position as
soon as your price has closed below the trend line, thereby
negating its value as support and generating a reversing signal.
Those willing to take a slightly greater risk can wait for two
consecutive closings below the trend line, provided the first
closing doesn't exceed the maximum permissible per-trade
losses (if such a limit is being used).

•  You can determine your objective in any of several ways. One
technique is to reverse positions once a new trend line signal
has formed. Another method is to sell your positions once a
resistance line has been touched or approached. In the ab­
sence of a resistance line, other techniques could be used in
liquidating a position, such as successively changing stops as
the price continues to move in your favor (known as a trailing
stop). The reverse procedure would hold true for selling short
on the penetration of support.

All of my examples are drawn from real-time trading and repre­ sent real situations in the futures markets. I could have very care­ fully chosen many examples illustrating ideal or perfect situations, but because the perfect situation is the exception rather than the rule, I have given you as many current examples as possible.

Trend line analysis is a viable technique that seems to have ex­perienced considerably less following in recent years as a result of the advent of more complex mathematical approaches requiring computer analysis. Nonetheless, the use of trend line analysis in SSFs is a viable methodology that is specific, simple, and cost ef­ fective. At least four different types of trend line signals, each adaptable to specific situations in stocks, futures, and SSFs, are:

•  Sell on support trend line penetration.

•  Buy on resistance line penetration.

•  Buy on drop to support return line.

•  Sell on rally to resistance return line.

Trend line analysis is likely to be a worthwhile technique in SSFs as it is not practiced by as many traders now as was the case in the past before computer applications were used (although these meth­ ods may not necessarily be as effective). Trend line analysis can pro­ vide exit and entry points based on support and resistance within existing trends in SSFs. And it is reasonably objective and can be applied in a fairly consistent fashion, provided simple objective rules are followed consistently.

Trend line trading does not require complex interpretations or sophisticated equipment. It is therefore ideal for the newcomer, al­ though it can also be used by professional traders as long as the rules for its application are followed consistently. And, finally, trend line trading can be used on daily or intraday data.

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