These are really good five rules you should be following if you’re trading with the trend.
1. Trends Move in Different Phases
What does that mean? Basically, when you’re in a trade, you hope that the trend is going to go straight up.
But it rarely does. In actual fact it will move in phases, it will have a good strong drive then it will come down for a little bit retrace, and then it will go up again. This can be repeated many times. That is why there are different styles and phases of a trend.
We have to have it in our minds that there are different phases that require different strategies for getting on board.
Now is it foolproof? Of course not. But it means you’re more aligned with the market conditions.
2. Expect a Continuation Not a Reversal
I’ve made this mistake so many times and probably still will continue to make it. The number of times it comes up to a level you think you know it’s run out of profits, comes so far, it’s going to turn and it just continues.
You know, you’re trying to be clever and you think that you need to see more. If we’re in a big trend you don’t just want to see a resistance point of some sort. You need to see a reversal and retest it.
The whole point of a trade is that it’s going to take our high after high and break it before eventually turns. Maybe it took 7 highs potentially, and now you have one in seven chance of hitting the right one. Of course, that starts to become more likely that the trend is going to reverse later on.
3. The First Counter-Trend Move Often Catches out the Most
If you look at the picture, you can see an uptrend that has two phases, in the first phase it is going up, but in the second it went down for a moment. That’s a bear flag that will highlight this counter-trend move.
And very often people will see reversal like that and they’ll say that’s phase two, although they will not be correct. It’s a reversal that jumps on the short side here.
That’s often why this second phase of the trend is way more aggressive and stronger than the first initial drive. Because you’ve sucked in a lot of people to the wrong end of it and people who have missed the initial boat are now jumping on board.
4. The Trend Will Continue Longer Than You Think
Continuation of reversal with very similar expectations when it retests that it might pause, it might give you signs to think that it’s going to drop but expect the continuation.
Play for continuation, don’t take a trade, you can still take a short. But you need to be saying to yourself that if you are going to take this short here the expectation is 20 percent, and your risk-reward is 1 to 10.
So the expectation is that it will continue not to reverse. It sounds pretty obvious but we do fall into that trap. If you trade for a while you know that when you see a trend going up, you think that it will no longer go up. That is it. And, you just there made a mistake. Five days later when you look at the trend you will see that the trend is still going up. It’s just a supply-demand imbalance.
5. Trends Will Keep Moving Unless There’s a Catalyst Opposing It
This is a really simple way but it makes so much sense and it’s a rule that can keep you out of so much trouble. You are going to miss some staff and maybe even some good trades, but if you think to yourself that unless you have a genuine reason to see this thing reverse, you need to stick with it.
Just align yourself with the trend. Sometimes it’s painful. You want to try and be clever but it just saves so much heartache pain and loss.
Yes, you can make money on the short side and uptrend is so many counter-trend moves that are available. And if you consider that over a year there’s going to be times when you can hit short and make money short. But it’s an easier play just to align yourself with one type of trend. Align yourself with one side and say that you are looking for long or short depending on the status of the trading.
So, the idea is that they will keep moving unless it’s a catalyst opposing it. That’s fine. It’s to align yourself with the way that the supply-demand is shifting.
Anyway, these are five trend trading rules that are worth following if you’re into your trend trading and there is no reason for you not to be.