Why I Don’t Trade Against The Trend

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“The Trend Is Your Friend”
This is probably the most common and cliched saying when it comes to trading, but it is so true. Trade with the trend and it will bring you good profits, trade against the trend and be ready to get your fingers burnt.

The truth is that you are always trading against a kind of trend. The reason why I say this is because trends occur in every market on every type of time frame, ranging from trends on a 1 minute chart to trends on a weekly chart. Every trader has his or her own unique style. Some traders prefer scalping (doing tens of tiny trades on a day), others prefer day-trading (taking positions and closing them by the end of the trading day) and others prefer taking positions that they hold for days or weeks.

You may not share my opinion, but from my experience I have learnt that it is best to trade with the larger trend and not against it. My definition of the larger trend is the trend on the daily charts. Trends on daily charts tend to last weeks to months so it gives a good indication in which direction to trade for reasonable periods at a time (meaning you don’t have to decide every single day which direction the larger trend is).

For example let’s take the above chart of Eur Usd on the daily chart starting from late 2007. Currently the trend is down since Dec 2009. Although in my weekly analysis I expect a bounce or rally to occur ( a possible rally of a few hundred pip) I will not try to go long to catch the bounce.

The reason for this being that while it is quite possible to trade corrections against the trend (especially if you use a stop loss and don’t become emotional about the trade), moves against the trade do not always go as far as they should or as you expect them to.

While I am taking into consideration that a bounce in the chart above could go up to 1.4000 or 1.4200, it is quite possible that bad news could just cause an acceleration in the direction of the trend (in this case a capitulation to the downside). If that capitulation occurrs and you are long (and not a strictly disciplined trader that sticks to his stop loss no matter what) then you may be tempted to remove your stop and keep adding to your long position as it drops further and further resulting in massive losses.

In the case of Eur Usd on the chart above I prefer to sit on the sidelines and observe. If it does indeed bounce as high as 1.4000 I will see how the chart looks at that time and then seriously consider shorting it because in my opinion as long as it stays under 1.4200 in this scenario the daily trend is still down.

This way of trading means reasonably little trades are done and sometimes there are periods of days or weeks where it is not possible to find a good entry point for a trade. Patience and discipline are required, but from my experience, this way of trading really works well.

It is applicable on smaller timeframes in the same way although I prefer to use daily charts to determine the trend and 4 hour charts to determine the entry point. If you trade 15 minute charts then you should look at a 4 hour chart to find the “larger” trend and if you trade 5 minute charts you should look at the 1 hour charts for the “larger” trend and then trade the smaller timeframes in the direction of the “larger” trends. It may sound a little complicated but simply said, if you trade 15 minute charts and the trend of the 4 hour chart is down, then you should be looking for entry points for a short trade on the 15 minute chart and not be trading long.

Please feel free to use or discard this information as you please. It is just the system that I use and may not apply to your method of trading. If you are a newbie or only starting out as a trader then I really feel there is lots of value in what I just described to you.