Many new traders fail in their attempt the corner the financial markets because they don’t master simple trading strategies. Instead, they spend large sums of money for sophisticated software that they’ve been told will make trading easy and wealth a guaranteed.

Of course, nothing is a guarantee in the financial markets. But a little knowledge goes a long way. And one of the soundest pieces of advice you’ll ever hear, if you haven’t already heard it a million times, is “the trend is your friend.”

That sage advice sounds simple enough. But what does it really mean? Many traders disagree when asked to define trend. And so newcomers to the market understandably susceptible to advertisements that promise fortunes with little work.

The purpose of this article is to teach the reader how to recognize a trend change. This technique can be used when trading stocks or commodities.

But before I go further, the Commodity Futures Trading Commission has asked me to advise you that trading futures or stock indexes is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invest. Of course, that's not unlike most other businesses. But informed traders are the best traders – because they survive!

Most students of the markets are familiar with the term already mentioned, “the trend is your friend.” But how the heck do you determine when a new trend has been established? Specific moving average crossovers may help.

Below you’ll find two charts for U.S. Treasury Bond futures. The first chart is a weekly view. As you can see, in the spring of 2004 the T-Bonds fell hard.

Each one-point move (112 to 111 and so forth) is a $1,000 value per futures contract. The weekly chart shows that T-Bonds fell from about 112 to 100. That’s 12 points, or $12,000 per futures contract.

Would you have captured that full move? I doubt it. But even if you had caught one third of that move – say, $4,000 per contract – and you had 10 contracts in the market, that’s a big gain.

Equally, as the market reversed in early summer and began its move upward, traders could have captured a portion of another 12-point move. A lot of money would have flashed before your eyes had you been watching.

But how do traders know when direction has reversed?

Let’s look at the next chart.

The second chart, below, is a daily view of March 2005 T-Bonds. After bonds fell in the spring of 2004, they began to move up. By July of that year the upward trend was established. How do I know?

The blue line (the one on top of the other) on the chart above is a 20-day moving average. That means it indicates the average price of T-Bonds over a 20-day period. At the beginning of July, the blue line crossed the red line. The red line is a 50-day moving average. The play between these two averages on a daily chart can offer clues as to which way is up and which way is down.

As the chart reveals, even when price pulled back (near the beginning of August and again in October, for example) the channel created by the 20- and
50-day moving averages continued up. Moving averages can only follow price. Even if price dips, if the average price still is moving up (or down) the moving average lines will move up (or down).

But look what happened in late November. Price dropped and pushed below the 20/50 channel and the blue line crossed the red line. Does this mean the price is ready to reverse and fall again?

Maybe. If price resumes its uptrend, the 20/50 channel will again begin to move up. But if price has lost its will to climb, watch for a clear crossover of the two moving averages. When that happens, the trend may have changed. And traders may want to enter this market for a long slide down.