The Trend Is Your Friend

The flip side of the title to this post is “don’t trade against the trend”.

The fact that markets trend is why traders make profits. Price is not completely random. Price tends to move in trends.

Trends are often delineated by trend lines.

When price is consolidating it tends to move in whipsaws about a moving average with choppy overlapping sideways movements. Price tends to move from resistance to support and back again, but not in a straight line. Overshoots of resistance and support can also happen yet price can turn back into the consolidation zone. It is impossible to tell exactly when and where price will turn, so if trying to trade a consolidating market losses are inevitable. Mean reverting systems for trading during a consolidating market are suited for the most experienced and nimble of traders only, not at all for beginners or those with only a few years experience.

When price has been consolidating for a while, then horizontal lines can be drawn to show the upper and lower boundaries of the consolidation zone. It then becomes a waiting game. Waiting for a breakout. When price breaks above resistance or below support on a day with an increase in volume, then a breakout is indicated and the market has begun to trend again.

When price is trending it moves in a clear direction, usually finding support (an upwards trend) or resistance (a downwards trend) at a sloping trend line. The clear direction of price movement is what makes profit easier, so the trick is to identify a new trend early enough to allow for profit to be made and then to identify when it is over early enough to exit the trade with a profit. For less experienced traders, it is advised to wait for a clear trend to be evident and then to only trade in the direction of that trend. Profits should be relatively easy as long as the trend is not exhausted.

If staying with the trend is the easiest way to make a profit, then it makes sense to avoid trading when the market is not trending.

It is often the trades that a trader does NOT take which makes the difference between profit and loss. Cut losses by avoiding consolidating markets.

If there is only one lesson that new traders can learn which will improve trading performance, it is to only trade a clear trend in the direction of that trend.