An ubiquitous urge, particularly among beginners, is to predict how markets are going to evolve in a given course of time. Having predictions subconsciously leads to trading them instead of actual market conditions. They become so inextricably enmeshed with a trader’s bias that objective judgments are not possible anymore.
Trading with the trend is easily the simplest and arguably the best trading metastrategy, but is not an actual strategy. The reason why so many traders have difficulty implementing it is a lack of details. It is a challenge: coming up with a detailed plan for trading with the trend that is consistently profitable. While the market wiggles and the inexperienced trader takes one loss after another, an experienced trend follower has been staying in his position during the whole time. No action was taken at all, but yet the trend follower ends up with a more advantageous position than the one who is trying to be assertive. Why is that so?
The trend follower listened to the market and is convinced of his edge and aware of his risk. He is also aware of the typical patterns that make up a trend. To avoid closing positions fearfully, you have to know why you are opening one in the first place. What is your rationale for going long or short? Every single trade of yours must be planned out with great care. It also includes having proper risk management in place, for example, with a stop-loss order.
The majority of traders who begin trading, choose to scalp out of fear and are so focused on the tiny wiggles that everything looks like an opportunity. We witness this behavior in various trading forums and online chats. What’s happening is subjective trading out of gut feel and fooling oneself with regards to progress made. This getting in-and-out every minute never seemed to me a paradigm for success in the long run. The market is a master in tricking the average person.
Since one cannot predict markets – or turnarounds for that matter – another plausible explanation for hyperactivity (besides prediction) is that a trader tries to catch up with the market. He missed out on the easy move down and is now at a disadvantage. Consequently, the only solution that he can think of is to buy into every spike, hoping to participate in a big rally. While the anticipated move fails to materialize, he is taking one pounding after another.
This show turns into real comedy when the market actually turns around. Now the trader is feeling left out all over again. He subconsciously reverses his habit, and keeps shorting on the way higher. He is playing cat and mouse with the market all day long, only to lick his wounds in the end.
What is a Trend?
We need to acknowledge that markets do not move like elevators, but like waves within a current. Uptrends are always interrupted by frequent reactions, whereas downtrends will witness just as many rallies. What we focus on, is the overall current in the shape of trends because this tells us the path of least resistance.
According to the Dow Theory, an uptrend is defined by a sequence of higher highs and higher lows. A downtrend is a sequence of lower lows and lower highs. Look at the SPY in the 1H time frame, for example, and you will surely get a clear picture of trends that you can take advantage of.
If a market is still showing a series of lower lows and lower highs, one simply does not go long in this environment. Buying is a much more challenging proposition because a long position will most likely fail sooner or later. This is due to the strong underlying market forces that are able to break support areas sooner or later.
At some point you may be lucky enough to have caught the bottom, but is it worth it? Let’s be realistic. Even if you did catch the perfect bottom, you have most likely exited prematurely out of fear of another sell-off anyway. So much energy is expended on catching turnarounds, resulting in so little proceeds while you could have it much easier.
Trends take time to shift from bearish to bullish. You will notice a shift soon enough once sellers stop selling where they are supposed to and buyers are cracking a significant resistance area. This all becomes visible in the aforementioned time frames.
Alternatively, regard price action from a psychological standpoint: Imagine yourself in the position of the buyer, then in the position of a seller. What would you be thinking in each case? Would you be contented with what’s happening in the market? What would you like to see to stick with your bias? It is a power game. This thought process is very powerful because it gives you a more objective view on the market and makes you reflect on the price action.
Listen to the Market
Beginners focus too much on the random moves intraday, than the actual trend in the broader perspective. Trade those, and you will witness far greater success. It is evident that a trader gets confused every single trading day anew.
Randomness has no logic, so do not seek logic in randomness. Random profits also create the illusion of progress in your trading. You get random rewards playing craps, too. But that does not mean that you know what the dice are going to do at the next roll.
To escape randomness, you must feel comfortable with holding your position over night, even several nights. It is a common misconception communicated among beginners that you need to close your trade within the same day. Anything can happen, they typically say. Trends last more than a single day. They last multiple days, sometimes months. Why? Because public sentiment does not shift from one moment to the next but takes a long time.
To trade such multi-day trends, you will need to figure out which support and resistance area is of real importance, and observe the price closely at those areas. They will stand out visibly as a trend unfolds and your eye will be trained to spot them by the time. A break of such zone is a potential entry for a new trade. By trading longer term time frames, you will not trade randomness, but trends that sustain themselves over multiple days. A welcome side-effect is that your broker commissions sink drastically.
Only take action if you observe clear evidence for a reversal. Otherwise you are better off doing nothing and letting the stop-loss order work for you. A stopout should happen where the original reason for your entry is no longer given due to objective observation of price action – not your gut feel.