So I am aware there is a special appeal amongmany traders to at least occasionally trade against the trend.
Most likely, the primary reason for this isthe illusion of an “attractive” price.
A market that has been going down for manyweeks or a market that is below its price of ten weeks ago, by definition is going tohave a relatively “low” price.
This “low” price will frequently appear attractiveto buy (and, of course, when the trend is up and the price is “high” it will look attractiveto sell).
Prices that have been in long lasting downtrendswill always appear cheap or low; and prices that have been going up for a long time willalways look expensive or high.
The danger of these seemingly attractive pricesis an important law of trading: continuation is more likely than change.
In this trading game, “high” tends to indicateeven higher and “low” usually means even lower—regardless of past history.
Over many of my early years of trading i madefar too many trades against-the-trend.
While I have not kept records from the beginning, i have absolutely no doubt I lost far more on these trades against-the-trend than I made(even though I have won some good trades against the trend).
I believe the same is probably true for you.
However, even more damaging than the amountlost on against-the-trend trades were the profits not realized due to missing good tradeswith-the-trend.
Far too often, trading against the trend misdirectedmy focus, and as a result i missed numerous excellent entry points for very profitabletrades with-the-trend.
I believe one of the worst things that canhappen to you, especially if you are a beginning trader, is to make a profitable against-the-trendtrade.
Yes, you heard it right.
This good result will make you want to entertrades against- the-trend again.
This would tend to make you think taking longshots against the trend is a good way to win, when in reality it is a path to almost certainfailure.
Against-the-trend trading has a tendency tobe addictive; the more you do it the more you want to do it.
One reason for this is that when a trade against-the-trendstarts out a loser, your initial reaction is that you was just a little “early” on yourtiming.
Therefore, there is a strong temptation totry again and buy or sell more at what now has become an even “more attractive” price.
One of the few “never, never” rules of tradingis to never, never add to a loser if it is against the trend.
Adding to an against-the-trend loser is juststubborn fighting the market, resisting the prevailing price energy flow.
It is trying to impose your will on the market.
allowingstubbornness to rule rather than intelligence.
Since many very bad things can happen to youwhen you trade against the trend, it is better to just not do so.
Act intelligently (meaning act in accordancewith the natural laws of trading) and do not trade against the trend (with the exceptionof those rare times the margin-of-error permits, and even then only if price action stronglysupport doing so).
To be honest, it has taken me a long timeto fully accept this, even though I “knew” it to be true early in my trading career.
Even now, knowing what I know, occasionallyi am tempted to make trades against-the-trend.
Now, having said all this, I am aware youmay choose to disregard this advice from time to time.
Therefore, if you insist on trading againstthe trend, here are some basic rules for doing so.
These are my personal 3 rules for tradingagainst the trend: 1.
Be more selective when getting in2.
Trade smaller quantities3.
Never add to a loserBut here’s the big problem with these against-the-trend trading rules, as easy as they are.
In real time, when you put money on the line, they are extremely difficult to follow.
When you trade against the trend you willalways be getting in at an attractive price [based on recent history); therefore, if theprice does move in your favor, you will begin to wonder if maybe the major trend might bein the process of reversing.
Next you will start to think you just mighthave caught “the” top or bottom and as a result may have a monster trade underway.
Once this possibility enters your mind youwill find it extremely difficult to get out with a moderate profit.
Inevitably, you will start to believe a hugeprofit may be available if the trend really does reverse, and thus you will tend to overstayyour entry.
I said it in my other videos: in trading itis important to know yourself.
When you trade against the trend especially, you need to know what sort of “time span” you will most often act upon.
What I mean is that if you are a short-termtrader and find it difficult or impossible to hold positions for long periods and insteadget in and out frequently, then you have to adjust your trading style accordingly to tradeagainst the trend.
If you are a patient or long term trader andhold for long periods regardless of short-term price movement, then you need to use a tradingstyle to capitalize on these tendencies.
Know yourself, and then use that knowledgeto adjust your trading style accordingly.
From my experience, for a trader who insistson consistently trading against strong trends, the only possible way to succeed is to bea short-term trader, as well as be very selective (I mean only positioning when momentum isclearly in your favor or you can make an excellent case it is about to turn in your favor).
One of the worst trading styles is to be along-term trader who consistently trades against strong trends.
This combination will inevitably result inconsistent, big losses.
Time always favors the trend, meaning overtime the odds favor the price eventually moving in the direction of the existing trend.
Continuation is more likely than change.
The stronger and more established the trend, the more likely this will turn out to be true.
Therefore, if you choose to use the approachof holding long-term positions against strong trends, you are virtually guaranteed to keeplosing substantial amounts.
Most long-term traders have this same flaw:the longer they hold a position the more difficult it becomes for them to exit the trade.
The longer they are in a position, the morelikely they will be to continue to hold on, regardless of price movement.
Once firmly established in a trade, many long-termtraders seem to become almost incapable of getting out, regardless of what the pricedoes.
Don’t get me wrong, there is a fine linebetween being a successful contrarian and betting against an established trend.
It’s perfectly okay to challenge the market’sopinion of whether an asset is over or undervalued, but you must have evidence to back up thatopinion.
Otherwise, you end up being “that trader”who is always betting against the crowd hoping for a reversal only to get wiped out in theprocess.
On top of evidence, you also need a favorablerisk to reward ratio.
Without this one thing, no trade is worthtaking, particularly one that’s against the trend.
If you’re going to trade against the trendalways be sure you have multiple reasons to do so.
These reasons can come in the form of reversalpatterns like the head and shoulders, double tops or bottoms, or breakouts of key supportor resistance levels.
The terms overbought and oversold are meaninglessas a market can stay irrational longer than you can stay within your account margin.
When I occasionally take a trade against thetrend, i mainly use key levels and price action, and I rely less on indicators (I only usethem for divergences).
Why? Because so many of the technical tools weuse lag the price action, so to spot a reversal in advance requires as much luck as judgment.
An indicator running counter to the trenddoes often give as a warning in advance, but is no guarantee that the reversal will happen.
Taking a ‘guess’ that a reversal is aroundthe corner is risky at best.
That’s why don’t try to guess when a marketwill turn.
Instead, use the key levels and technicalpatterns at your disposal.
Let the market show its hand before you decideto commit to a countertrend position.
It’s always better to gain an extra layerof conviction before pulling the trigger than to try to buy or sell at the absolute bottomor top of a move.
There is another reason to limit your tradingto with-the-trend trades.
Every day, in every market, you are facedwith three choices: go long, go short or stay on the sidelines.
Limiting your trading to with-the-trend tradeseliminates one of these choices, thereby leaving you with “only” having to decide whether tobe in with the trend or on the sidelines.
Choosing correctly between two options ismuch easier than choosing among three.
Over time this simple statistical advantagealone can prove to be the difference between success and failure.
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Until next time.