Learning to Use Market Trends for Your Advantage
“Trade The Trend”, “The Trend Is Your Friend” and a host of similar cliches
exist in our profession for a reason: sound advice that has stood forth thru
eternal tests of time.
Defining a trend is based upon trade-chart timeframe, and also the expected
period of trade execution from entry to exit. Clearly, the description of a
given market’s trend to a swing traders playing hourly or daily charts can be
completely different to intraday traders operating inside five minute to one
minute charts. “Trend” is a loose description of which way price action moves on
the chart we are triggering our trades from, in my opinion.
In my career I’ve noticed a distinct and repeated difference between new and
experienced traders when it comes to trading trends. I’ve also lived thru both
sides of the process myself. Understanding how many of us evolve could easily
make us all better at what we do.
Until It Stops Working
New traders are attracted to our great game from various demonstrations of
how much money is possible to make while buying low and selling high, or
vice-versa. Bodies in motion tend to stay in motion. That which is happening now
is perceived by humans to project forward endlessly into time.
It’s easy: just enter a trade long or short, hold on for the ride and exit
with obscene amounts of profit. Do a little victory dance afterward, buy all the
material things our little hearts desire and live life, large. Isn’t that what
more or less initially hooked us on this course of life?
The very idea of fighting a trend never occurred to me in my early years.
Likewise, new traders I work with are most eager to keep buying a market going
up or selling one that’s going down. That natural willingness to take
continuation trades persists for awhile. After some number of trades taken in
sideways markets, the inner belief of trend trading shifts. Just sell a few
bottoms and buy a few tops in sideways or trend-changing markets, and our trust
in following the trend begins to crumble.
We then look at the charts a bit differently. We feel the various negative
emotions over a string of losing trades and wonder what else could have been
done. Slap on some oscillators, price bands, pivot points or whatever and it all
becomes crisp & clear: selling resistance and buying support is definitely the
way to go!
Up And Down, Side To Side
If I had a dollar for every time I’ve read = heard someone say, “I’m a
contrarian by nature” it would stack up to a pretty decent pile in front of me.
I wonder… were those traders actually born mavericks who prefer to buck the
crowd? Or did that opinion evolve and strengthen after getting burned taking
trend continuation trades in sideways markets too many times?
All financial markets spend time moving up or down, and then consolidating in
rest while rolling side to side. I’ve never found a single method or approach
that hits every trade perfectly in both market conditions. I doubt such a tactic
exists. Whether we look at a market with expectations of a trend trade working
or failing to work is really the crux of this matter.
Taking trend trades = continuation trades inside a market going up or down is
fun. It’s rewarding. It’s lucrative. It reinforces the notion that such efforts
are indeed worthwhile. The newer we are to trading OR that we are to trading a
new method / approach, the more impressionable we will be on immediate feedback
of results. Right or right? If we have no other experience to draw from than the
first sequence of trades taken, that first sequence of whatever duration means a
whole lot to our beliefs.
Sooner or later we all get stopped repeatedly while taking trend trades
inside a market that’s paused in sideways fashion. No one bothered telling us
the trend wasn’t in play right now… we naturally assumed it was. Then we
review the recent results, see that fading the same losing trades would have
profited and draw new assumptions = conclusions that trend trading does not
work. Sound at all familiar to you?
Buy Support, Sell Resistance
Regardless, there is no question that buying support and selling resistance
is profitable, done correctly. Heck, I do it all the time inside my own method(s)
of trading. However, at this stage of my career I am buying pull backs into
support of an uptrend or selling pull backs into resistance of a downtrend.
In the process I miss just about all of the exact tops and bottoms of a
directional change. When I’m stopped out on a trade for loss, it is either do to
sideways chop or defined directional change. that or I simply goofed and took a
lousy trade entry, for whatever reason that still happens with most of us.
Regardless, I no longer try to pick tops and bottoms. I do not pass up
continuation signals in favor of the chart’s trend while waiting for reversals
I don’t make that mistake too often any more, but I did so recently.
The 8:30am EST Payroll report had pre-staged orders in the GBP/USD and USD/CHF
for longs above and shorts below certain price levels. After the news broke, GBP
shorts and CHF longs triggered and eventually yielded +50 pip per contract gains
By the time stock markets opened for business in the pits, emini futures
opened on gap-down moves deeper into Thursday’s hole. All of them lifted enough
to trigger opening range short signals in the method I use, ER in particular
short just below 682 level. After covering that trade for +3.9pts per contract
on a trailed stop (slipped a tick on the fill), we saw price action coiling
sideways in classic slim jim fashion (Haggerty’s excellent course, along with
his 1-2-3 method package) while flashing sell signals twice near ER 666.50
After dropping nearly -20 index points in just one day and two hours, I
naturally held doubt that such a short signal would offer more than a point or
two of potential profit. The signals were there off & on for about an hour, then
ER broke the slim jim down to 661.30 lows and that specific signal I passed up
offered another +5pts potential profit, or anything less in between.
I’d like to say that the whole reason for my personal choice to pass up what
turned out as a very profitable trade signal was due solely to previous trade
success that morning. In fact it was part of the process. I tend to press trades
more when daily profits are thin, and sit back a bit when gains have been solid.
Those are personal traits I need to work on myself, which is topic for another
article or three. As Don Miller has repeated in this forum for years now, there
is nothing wrong with the markets or the method. When our trading is out of sync, we can usually find the solution by looking inside ourselves.
Some part of me watching those continuation short signals flashing past let
doubt creep in that it would work once again. Where could that doubt have
possibly come from? Many, many similar continuation trades that blew out stops
soon after entry. There is no erasing the experiences we have in our trading
past, for better or worse. Controlling them is the best we can do… and that
includes 100% mechanical systems with ironclad rules, too. Those can be thwarted
by human decisions just as easily as any discretionary approach.
It all boils down to pain or indifference to loss. I personally use a -$100
initial stop while intraday trading the ER. That specific trade worked for up to
+$500 gained. Could I absolutely afford to take an equal ratio of losses to wins
of similar structure and fair just fine? Of course. How about a 40% win ratio
where losses where -$100 and wins were +$300 on average? You betcha.
The cold math works, but the warm emotional aspect of taking what appears to be
certain loss exists as well. That is equally true while watching a 100%
mechanical approach book its historical loss and allowing it to take the next
trade signal ahead. I’m guessing you either know exactly what I mean by all of
this, or some day you probably will.
There is no easy money in trading. There are some approaches I consider
easier than others. Trading long or short in harmony with any trend is
infinitely easier than bucking said trend. You will find over time that even the
contra-trend trades offer less potential than the trend trades. It is very
common to see a trend move in Market X continue to rise +10pts, pull back -5pts
and rise +9pts from there.
Targeting trades inside the two moves up while ignoring the pull back to
short makes for easier trading than attempts to scalp out profits on the short
side from inside a rising tape. I learned that lesson for myself many, many many
times over. I recall scratching out meager gains (at best) while fighting a
directional session, feeling beaten up and exhausted by day’s end. Looking back
at the chart in hindsight, it was clearly apparent (hindsight does that for us)
that taking one – three entries in harmony with the trend would have won and won
Ever make that discovery yourself, or am I all alone on this one here?
After fighting too many directional sessions and not making the kind of money
I should have, it was time to fade myself. Time to change my outlook and
expectations. Trade each signal as if the trend will last forever. When that
fails to work, it’s probably time to look the other direction from there.
This week in the stock index futures was sideways, minuscule range congestion
Monday thru Wednesday. Thursday and Friday offered directional trade profit
potential to make up for those other three sessions entirely. Being a newborn
trend-following moron myself, I find it much easier to rack up methodical
profits when I stick with this mantra and resist out-thinking my methods.
Friday’s example of a passed trade signal offered numerous times in front of me
proves that I remain a veteran work in progress.
Whatever your method, style and preferred market for trading is, please ask
yourself two simple questions:
#1 – Could I make more money by following the trend, or by fading it?
#2 – If trades with the trend were held a bit longer than I dare, would I be
As always, I’ll never espouse any style or method of trading that works for
you right now. More or less money in the account at week’s or month’s end is the
emotionless scale of measure we exist by. Tip that scale too far in the red,
game over. Opinions and beliefs matter much less than actual results.
Austin Passamonte is a full-time professional trader who specializes in all commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets