A Trader’s Number One Biggest Sin and How to Avoid it.
The Power of a Trend; How and When to Trade Against It.
That’s a big title! It’s a big problem too. Flat out, the trader’s greatest sin is trading against the trend and trying to fight it. If you ever listen to me, now is the time. This has the power to blow accounts. This has the power to make you cry and take you out of the game forever! We have all heard “the trend is our friend” and “don’t fight the trend” and yet there is nothing more responsible for wrecking more trading accounts than this!
I am here to tell you that “the trend is your friend” is the God’s honest truth. Why would you ever try and paddle up a river that is throwing raging rapids against you?
How do we determine the trend? Simple. Look with your eyeballs. Trade what you see and not what you believe. Forget the news. Forget all the other traders and what they think. Forget the social forums and asking some other trader (who may actually be a loser) what he or she thinks. Look at the daily and the hourly charts. Where are we? Yes, there are times we are in a daily down trend and can have an hourly uptrend all day long. I am not talking about that. Are you trading today? Which way is it going today? If the hourly trend has changed and we are going up, then trade up.
Does this mean that we should blindly place trades in stupid places? No. We are like tigers or lions stalking our prey. We have one shot at this; one chance of making our big kill for the day or our babies go hungry. So we wait until everything is just right… and then we pounce on it!
In a downtrend on a daily chart, I ask you: how low can it go? Lower than you ever think possible! You say: “I want to pick the bottom!” Really? Where is it? Trust me. You will be rendered insolvent before you ever get it. However, even during mega daily down trends, I can see multiple days of up moves. So, when do we know to take it long? Only upon exhaustion. And this is where our 4 hour and hourly charts come into use.
We only look to take something long when it is exhausted to the downside. We do not look for massive gains, no, only retracements. We do not marry the position! Simply grab a pocket of up movement and get out. In daily downtrends we look to go short when it has retraced to the moving averages and price puts in a sell signal. Remember that price action rules. Hourly sells rule. Consolidations and hourly breakdowns rule.
We do occasionally see up days. This will be clearly evidenced on the charts. Has it just had a massive 3 day run straight down? 5 days straight down? There will always be short covering and profit taking so we can trade it up on those days. Hourly charts will tell us. In fact, on some pairs, we can fall 7, 8 or 9 days in a row, then have an hourly double bottom or triple bottom. So I would be willing to take things long on scalp trades or intraday swings under the right circumstances.
Alright, let’s look at the long side of the equation. Tell me… if a daily chart is in an uptrend, what direction should we be looking to trade?
We see very little in the way of down days when we have strong daily up trends. Really, the pullbacks are few. In such a case we want to look at all pullbacks as buy-able events on hourly charts. When fighting the trend we must remember it is a counter trend trade, so we keep it “light and tight.” That is light position sizes and tight stop losses.
So considering an uptrend, is it wise to blatantly short without the proper signals? Yes, there can be a few down days and there can be a few pullbacks, but it is simply mostly up. So why not trade pullbacks for up continuations?
So the grand conclusion on this is this: Once you identify that a trend has begun, trade in the direction of that trend as long as you possibly can. Do not try and fight it. It’s too powerful. We do not want to be hurt. What have we to prove? We are not long term investors with limitless capital. Why tie up a thousand dollars of capital to short something and hold it 100 pips against us and lose 100% of that capital? No, we trade mostly in the direction of the prevailing trend and are happy that the tide will sweep us along with it.
Remember that there are only 3 possible movements: up, down and sideways. We trade what we see.
Forget the fundamentals. It does not matter that Japan is gripping and moaning about how much they are hating their strong yen. It does not matter that they keep threatening to do something about it, over and over again like a broken record. They have proved to be fakers and not real in their intervention attempt rhetoric. Intervention has short lived results (remember the Swiss! They got killed on the intervention). It does not matter that the Japanese demographics are horrible and that the fundamentals do not warrant insane yen strength. We must trade the trend because the trend rules.
Forget the fundamentals. It does not matter that the Euro Zone should be blowing up. It does not matter that the market doesn’t seem to care about their debts, and the banks and the crisis that is lurking behind every corner. What does that matter when the dollar is being sold en mass? What does that matter when you see the Euro ripping to the upside and the Pound, Aussie and the Kiwi all following suite? Trade what you see, not what you believe. Always, always do this. The charts do not lie. They are your friends. Do the right thing and you will be OK. As Jesse Livermore told us: “never fight the tape”.