Trading With the Trend
by Jerome "Mel" Hickerson
I hear a lot of talk about “trading with the trend.” As if this so simple proclamation imparts some kind of essential wisdom that is important to a trader.
Let’s begin with a definition of terms. Trading with the trend is quite simply, in the essential grist of the idea, a successful trade. Trading against the trend is very simply a losing trade. Maybe there are traders who get up in the morning and feel generous and set out to give their money away to the market by trading against the trend. Maybe. But I have never spoken to one nor even heard of one such trader.
Every trader I’ve heard of sets out to be successful and wants to trade with the trend. But how do you determine the trend?
That is really the crux of the matter. Without somehow identifying the trend, you find yourself constantly amazed and bewildered by the action of the market. You will find yourself consistently thinking that something else should have happened, that the market action will soon reverse course and your mindset will eventually play out.
While you may be correct, the above thinking is one of the clues that you are trading against the trend. If you find yourself frequently thinking that the market is acting bizarrely, my bet is that you may also be losing money by being on the wrong side of the trend.
So all this talk about trading with the trend really boils down to correctly identifying the trend. But what trend is that? Does it benefit you to trade yesterday’s trend? Or last hour’s trend? Last time I traded, it only benefited me to correctly determine the next hour’s or next day’s or next week’s trend. Trading yesterday’s trend is, in the words of my teenage daughters…so yesterday.
Identifying the future trend is the key to successful trading. Prophesying the future is always a chancy business. In biblical times, at best you were often run out of town for it; and at worst you became a martyr. Now they often simply just call you a weatherman.
Prophesying is what the weatherman does, the race track tipster, the fortune teller who reads palms or gazes into a crystal ball, the stock market prognosticator. Each one is predicting the future – sometimes exactly, sometimes in vague, veiled, or ambiguous language, sometimes simply with a claim of statistical probability, but always with a claim seriously made of disclosing some piece of the future.
What all of the above mentioned professions have in common is that they attempt to use current observations along with past experiences to make judgments about what is likely to occur in the future.
Think about the weatherman and what he does. He has years of observational data on weather conditions, charts and pattern recognition. When he spots what has happened before, recognizes a pattern similar to current conditions, he can spew reasonable guesses with odds for what may happen tomorrow.
The race track tipster attempts similar feats with race data. The fortune teller is quick to use whatever information they have about you, human nature, etc to spin their prophesy.
Even a contra-trend trader is doing this; although a bit more unsuccessfully because by definition, contra-trend is wrong and therefore losing money.
The key to successful trading lies in looking at the facts you know, current conditions and past patterns, and then correctly looking into the future and correctly identifying the likely trend. Every trader attempts this at some level; many with great success and others with poor results.
So it seems to me that telling people to trade with the trend is a waste of breath. Everyone is already trying to do this. Much more useful would be telling people what you see is the upcoming trend, along with your reasoning for coming to that conclusion. We can all see the past trend; but the upcoming trend is what matters most.
This is what I try to do each night and throughout each trading day. We all use different methods; some like to use ewave, some use chart pattern recognition, some, like me, prefer to use the overbought/oversold oscillators, or a mixture of any and all of the above.
There are times when reliable methods do not worked well. This has the effect of making many trend traders into contra-trend traders.
For successful traders, when the market changes, the trader changes his methods as dictated by the market and moves on to more successful trades. This often involves changing time frames, position sizes, stops and targets, as well as changing methodology for entry and exits.
As a trader, your success depends on being flexible. If your methods are working, don’t change a thing. What isn’t broken doesn’t require fixing. But if you find yourself constantly complaining about the action of the market, adjust your methods until you find what works in the market now.
Good luck identifying and trading with the trend!
Note: Regular weekend update sometime on Saturday.
Today we closed out of:
Ultra S&P 500 ProShares (SSO) +1.66%
