Trend Trading Is Serious Business : So much has been written on the subject of ‘trading with trends’. And for good reason, because the longest duration moves happen with the trend, not against it.
However, with all that has been said and written on this subject, many traders cannot resist the urge to enter a trade at a price location they expect to be the ‘end’ of the trend.
Who doesn’t want to win the lottery, or win a grand slam, or Ed McMahon knocking on the door to say “You won the Million Dollar Lottery”? Entering a trade just when the old trend ends and a new trend starts (in the opposite direction) will feel like winning a big prize. That is the lure that ensnares those who try this low probability trading approach to accumulate preventable losses.
In my profession as a Market Analyst, performing various calculations or using various methods, my job is to determine when market peaks and bottoms will occur. This information is provided to my clients to make informed trading decisions. If used correctly, tremendous gains with low loss exposure are usually achieved. On the other hand, if not used properly, it can be worse than having no information at all.
BEST WAY TO TRAD THE TREND
If you are one of my FDate market time clients, you are notified in advance each week about when to expect the daily market turnarounds listed on our weekly reports. These ‘Gyrations’ are cycles of ups and downs that occur at uneven time intervals on the price chart. Some of these tops and bottoms can be traded for very good profits and some should be avoided immediately to enter the trade. How do you know which one?
The answer lies in this simple concept; take trades that are COMPATIBLE with the current trend and avoid entering trades that are AGAINST the current trend.
Trends are determined by noting where these market tops and bottoms form. For example, if the price goes up (a series of high-high price bars on the chart) and then starts to fall (a series of low-low price bars), the swing peak produces the highest price peak before going down. When the price stops falling and starts making the price higher (the price goes up), a swing bottom forms at the lowest point before rising again.
The question is, is this low above or below the previous low (previous swing bottom)? If so, you may have the start of a new bull trend. If the price continues to rise above the previous swing top high, then the pattern is a bullish trend. In other words, whether a trend is bullish or bearish depends on WHERE the swing tops and bottoms are forming. Here are the simple trend pattern rules:
1. A bull trend is a chart pattern where you have a higher swing bottom formation. You will often have higher swing tops forming as well, but for a bull trend, this may or may not always be the case. I have seen many bull trends where each swing bottom formed higher than the last swing bottom, but the swing top from time to time was not higher than the previous swing top.
The bull trend takes a lot of work to form, like pushing a rock up a hill with gravity working against you. A bull trend may fail to form an occasional higher swing bottom, but it cannot form a swing bottom lower than the last two swing bottoms and is still considered bullish.
2. A bear trend is a chart pattern where you have a lower swing top and a lower swing bottom formation. Because bearish trends are easier to form (prices often fall faster than they go up), a solid bearish trend is expected to have lower swing tops and lower swing bottoms.
If it fails to have a lower swing bottom, there is still too much strength left in that market. It can fail to form an occasional swing top lower, but it cannot form a swing top higher than the last two swing tops and is still considered bearish.
The point of the above discussion is to understand that if you want to trade off expected highs and lows, such as THE BEST LOCATION TO ENTER A TRADE, you want to make sure that you enter the ones that get you into trades ‘with’ the trend and not against it.
Therefore, if the trend is a bull trend, buying ‘higher swing bottoms’ (trading with the trend) is much better than selling ‘higher swing tops’ (against the trend). If the trend is bearish, selling ‘lower swing tops’ (trading with the trend) is much better than buying ‘lower swing bottoms’ (against the trend).
Knowing when to expect market peaks and bottoms is an excellent timing tool. This is undoubtedly the safest place you can enter the market, as it is the start of a new move and allows for lower risk exposure. If you have the knowledge to determine where these peaks and bottoms will form, you have an excellent advantage of making big profits due to market timing. But this only applies if you follow the ‘in trend’ trading wisdom.