So much has been written on the subject of ‘trading with the trend’. And for good reason, as the moves of longest duration occur with the trend, not against it.
Yet, with all that has been said and written about this subject, many traders cannot resist the urge to enter trades at price locations that they expect to be the ‘end’ of the trend.
Who doesn’t want to win the lottery, or to hit a grand slam, or have Ed McMahon knock on the door to say “you won the Million Dollar Sweepstakes”? Entering a trade right when an old trend is ending and a new trend is beginning (in the opposite direction) would feel like winning the big prize. That is the lure that snags those who attempt this low probability trading approach into accumulating preventable losses.
In my profession as a Market Analyst, performing various calculations or using various methods, my job is to determine when market tops and bottoms are likely to occur. This information is provided to my clients in order to make informed trading decisions. If used correctly, excellent profits with low-loss exposure are usually achieved. On the other hand, if not used correctly, it can be worse than not having the information at all.
THE BEST WAY TO TRADE THE TREND
If you are one of my FDate market timing clients, you are informed in advance each week as to when to expect the daily gyrations of the market listed on our weekly report. These ‘gyrations’ are the cycle tops and bottoms that occur in uneven time intervals on the price chart. Some of these tops and bottoms can be traded for excellent profits and some should be outright avoided for trade entry. How do you tell which?
The answer comes down to this simple concept; take trades that are WITH the current trend and avoid entering trades that go AGAINST the current trend.
The trend is determined by noting where these market tops and bottoms are forming. For example, if prices are rising (a series of higher-high price bars on the chart) and then starts dropping (a series of lower-low price bars), a swing top results at that highest peak price before dropping. When price stops dropping and starts making higher-high price bars again (rising prices), a swing bottom is formed at the lowest point prior to rising again. The question is, was this lowest point above or below the previous lowest point (the prior swing bottom)? If so, you may have the beginning of a new bull trend. If price continues rising until it exceeds the previous swing top high price, the pattern is that of a bull 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. Bull trends are chart patterns where you have the formation of higher swing bottoms. You will often have higher swing tops forming as well, but for bull trends this may or may not always be the case. I have seen many bull trends where each swing bottom is formed higher than the last swing bottom, but swing tops from time to time are not higher than the previous swing top. Bull trends take a lot of work to form, as it is like pushing a boulder up a hill with gravity working against you. A bull trend can fail to form a higher swing bottom once in a great while, but it cannot form a lower swing bottom than the past two swing bottoms and still be considered bullish.
2. Bear trends are chart patterns where you have the formation of lower swing tops and lower swing bottoms. Because bear trends are easier to form (prices often drop faster than it climbs up), a solid bear trend is expected to have both lower swing tops and lower swing bottoms. If it fails to have lower swing bottoms, there is too much strength still left in that market. It can fail to form a lower swing top once in a great while, but it cannot form a higher swing top than the last two swing tops and still be considered bearish.
The point of the above discussion is to understand that if you are looking to trade off expected tops and bottoms, as are the BEST LOCATIONS TO ENTER A TRADE, you want to make sure you enter the ones that get you into the trade ‘with’ the trend and not against it.
Therefore, if the trend is a bull trend, buying off ‘higher swing bottoms’ (trading with the trend) is much better than selling off ‘higher swing tops’ (against the trend). If the trend is a bear trend, selling off ‘lower swing tops’ (trading with the trend) is much better than buying off ‘lower swing bottoms’ (against the trend).