What does it mean not to trade against the trend, Should You Trade Against the Trend?


By Selwyn M. Gishen Updated Jun 25, As a traderyou have probably heard the old adage that it is best to "trade with the trend.

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  • Viber Every now and then, you will see the markets consistently move in a single direction, this is known as a trend, much like sheep, most people will jump on the trend, trading in the same directions which can potentially add to its momentum.

This is sage advice as long as you know and can accept that the several ways to make money can end.

And then the trend is not your friend. We believe in the KISS rule, which says, "keep it simple, stupid!

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Before we get started, we want to mention the importance of time frames in determining the trend. Usually, when we are analyzing long-term investmentsthe long-term time frame dominates the shorter time frames.

What Is a Trend?

However, for intraday purposes, the shorter time frame could be of greater value. Trades can be divided into three classes of trading styles or segments : the intra-day, the swing, and the position trade.

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Large commercial traderssuch as those companies setting up production in a foreign country, might be interested in the fate of the currency over a long period of such as months or years. But for speculators, a weekly chart can be accepted as the "long-term.

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To do this we will resort to two very useful tools that will help us determine the trend. These two tools are the simple moving average and the exponential moving average.

Chart 1: May July Source: Netdania.

Become a Millionaire! It would be really good if there was a way to enter the market right when it started going up, and get out right when it reverses. It is not their fault in most cases. This mistake is what they learn from some trading courses, videos, sites, and…. One day I attended a seminar.

This indicates the trend is showing a rise of the euro and therefore a weakening dollar. In Augustthe short-term moving average blue on the chart below turned down, indicating a potential change in trend although the long-term average red had not yet done so.

Written by Andy Why is it that so many advisers tell us to trade with the trend? I think there are two times that you might consider going against the existing trend.

Finding the Change in Trend In October, the day moving average crossed over the day moving average. Both were then sloping downward.

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At this point, the trend has changed to the downside and short positions against the euro would be successful. But a closer look at the day moving average, as of Decembershows that the long-term moving average has remained downward sloping.

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The second arrow indicates where a new short position could have been successfully taken once the price had traded back to the down sloping moving average. The goal here is to determine the trend direction, not when to enter or exit a trade.

Trend Trading vs Counter Trend: Trading Against Trend On Forex \u0026 Stock Market

Of course, this is not to say that there were no trading opportunities in the shorter time frames such as the daily and hourly charts. But for those traders who want to trade with the trend, rather than trading the correction, one could wait for the trend to resume and again trade in the direction of the trend. Given that a double bottom on a chart suggests support at the bottom, we can watch the price action daily to give us an advance clue.

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The arrow indicates where the short-term moving average is turning up. Once again, the moving averages are not used as trading signals but only for trend direction purposes. Catch a Wave By setting up a short-term exponential moving average and a longer term simple moving average, on a weekly and a daily chartit is possible to gauge the direction of the trend.

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Knowing the trend does help in taking positions but bear in mind that the markets move in waves. These waves are called impulse waves when in the direction of the trend and corrective waves when contrary to the trend.

By counting the waves or pivots in each wave, one can attempt to anticipate whether a trading opportunity will be against the trend or with the trend. According to Elliot wave theory, an impulse wave usually consists of five swings what does it mean not to trade against the trend a corrective wave usually consists of 3 swings.

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A full wave move would consist of five swings with two of the swings being counter-trend. Because Elliot wave theory can be very subjective, we prefer to use a pivot count to help me determine wave exhaustion.

This usually translates into a minimum of seven pivots when going with the trend, followed by five pivots during a correction. Sometimes the market will not cooperate with these technical assumptions but it can occur often enough to provide some very lucrative trading opportunities.

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Below is an example of the wave in action blue arrows mark the direction. Chart 5: Elliot Wave Source: Netdania. Remember trading is a craft, which means that it is both art and science and requires practice to develop what does it mean not to trade against the trend and profitability.

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