If you’ve been involved in
Trading for any decent length of time, you will doubtless have
heard the old adage, “The Trend Is Your Friend”. Well, I have a
major announcement about that:
It’s true!
In fact, I was thumbing
through Jack Schwager’s Market Wizards books the other day, and
I was struck by how many of the top traders he interviewed
stressed the need to trade with the trend. It seems to be a
commonality among all the truly great traders he interviewed.
Sometimes, the simplest
things can be the most important and therefore the most easily
overlooked. So yes, you should whenever possible trade with the
major trend and devise trading systems and methods to help you
to do that.
Trading with the trend
does NOT mean that you have to come in near the very beginning
of the trend and exit near the very end of it. Even if you only
capture half of the total move or less, you are still doing
well. In fact, there are a variety of ways to interpret what
trading with the trend actually means in the first place.
For example, if you are a
day trader, the trend for you may be just the intraday move.
However, if you are aware of the need to trade with the trend,
you may also look at what the daily chart is doing, and then
choose day trades that only go in the direction of the higher
timeframe trend. In this way, you are riding on the coat tails
of the higher trend, which may last for weeks or months, even
though your own trade may last for mere hours.
When people do NOT run
with the trend is when they tend to come unstuck. Certainly, if
you have mastered trend trading, then perhaps you may wish to
dabble with trading the reaction moves against the trend.
However, it is much more risky and less assured of success, and
therefore you do need to have mastered trend trading first.
Most difficult of all is
top picking and bottom picking. This is where people think they
have found the end of one trend and want to get into the new
trend in the opposite direction as soon as possible. All too
often for these people however, they find that “the trend is
your enemy” when you are on the wrong side of it!
Once you have decided to
trade the trend, the next thing to do is to develop a system, or
variety of systems to do so. The key to success with this system
will be how it manages losses and takes profits. A system that
allows for losses that in the long run are greater than the
profits cannot succeed. Hence, you need to integrate a strong
method for detecting the trend move, coupled with a system for
stopping you out rapidly should the trade move against you.
How you pyramid, or if you
pyramid at all, has a big impact upon how successful your trend
trading approach will be. Hence, it is important to know in
advance precisely what your pyramiding strategy will be, should
you choose to have one in the first place. A poor pyramid
strategy will easily turn a winning trade into a loser, even in
a strong trend. Thus, it is better NOT to have a pyramid
strategy at all than to have a bad one!
Even in a major trend, it
is important to remember that the money is not made riding it
all the way from the bottom to the top. These days, markets are
far too volatile too allow anything but a very rough ride for
anyone who tries to do that. It will take a heck of a long time
too, and more patience than most people have. You only have to
look at any major market to see how huge are the retracements
and how prolonged can be the sideways consolidation periods.
If you think about it,
from a pure profit point of view, the shortest distance from a
major bottom starting a trend to the major top ending it is the
vertical distance between them. However, the market obviously
does not trade like that. Rather, it zigzags back and forth,
often retracing almost all of a previous impulse wave with a
huge retracement. Hence, the actual total potential profit from
a trend is far greater than the simple vertical point distance
between top and bottom. It consists of the total of all the
trend moves that have taken place in the direction of the major
trend. Many of those often cross the same price ranges again
that they have already visited in preceding trend moves.
Therefore, the best trades
come from picking the phases when the market has resumed the
major trend, and finding a way to enter into that move early,
capture the majority of the profit from that phase that your
method allows, and then exiting gracefully once your system
takes you out of the trade. You then wait for the next trade
signal when the market shows evidence that it is ready to surge
again.
Hence, in summary, the
trend really is your friend and you should focus the vast
majority of your time figuring out how to trade it well, and
less time figuring out how to trade corrections, or how to spot
the end of major trends so that you can go the other way. Ride
the trend, and you can even be a little off in your entry
timing, and still come out looking like a hero.
