Learning to Use Market Trends for Your Advantage

"Trade The Trend", "The Trend Is Your Friend" and a host of similar cliché 's 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 to happen.

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 GBPUSD and USDCHF 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 apiece.

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 level.

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 synch, we can usually find the solution by looking inside ourselves.

Veteran Doubt

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.

Easiest Money

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 big.

Ever make that discovery yourself, or am I all alone on this one here?

Regained Trust

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, miniscule 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.

Summation

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 more profitable?

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 E-mini stock index futures, equity options and 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. His website is www.CoiledMarkets.com.

You can find more how-to and educational articles to improve your investing and trading each day on TradingMarkets.com.