Trend: Applying the concept the trend is your friend
Many traders like to trade every single swing in the market. In reality, unless you trade as a High Frequency Trading machine or you are a market maker, it is almost impossible to trade every single swing. After years of trading and suffering shallow bounces and losing some money, I realized it is better to trade with the trend. In this article, we’ll take a look at the reason why trend trading is better and also define what trend is.
By definition, trend is a general direction in which something is developing or changing. Trading is a directional move; it is usually powerful and well defined. Although many traders always say that the trend is your friend, but in our experience most traders end up buying and selling against the trend. We at ElliottWave-Forecast always teach the importance of buying and selling with the trend. We identify two sequences in which the market moves, a 5-9-13 sequence and 3-7-11 sequence. In the case of 5-9-13 sequence, for every 5 waves move there are 3 waves back against the trend. In 3-7-11 sequence, for every 3 waves with the trend, there are 3 waves against the trend.
Trend in the simplest term is a sequence of lower lows and lower highs when it is bearish, and a sequence of higher highs and higher lows when it is bullish. It is also very important to understand that the trend is related to time frame. In higher time frame, trend is easier to identify and more reliable because there’s less oscillation. To illustrate this idea, let’s suppose we use different time frames to analyze a 1 year data. A monthly chart has 12 monthly bars. A weekly chart has 52 weekly bars. A daily chart has 365 daily bars. A 4 hour chart has 1460 4 hours bars. A 1 hour chart has 8760 1 Hour bars. A 15 minute chart has over 35000 15 minutes bars. Consequently, the higher the number of bars, the more dangerous the trade becomes and the harder to catch the trend.
Like we said earlier, trying to catch every swing in the market is hard. The lower the time frame of trading, the harder trading becomes. We believe the only way to survive in this market is to become a trend trader and understand that as a human, it is pretty hard to be able to catch every swing, As a trend trader, it is better to buy/sell in 3-7-11 swing against the ruling cycle or against the trend. By waiting for correction to reach the extreme area against the trend and then buying / selling this correction in 3-7-11 swing, we improve our chance to catch the next extension in the direction of the trend.
Even in the case there’s no more extension in the previous ruling cycle / trend, by using this technique of buying / selling extreme area in 3-7-11 swing against the previous ruling cycle, it can still provide us at least with 3 waves reaction and a break even trade. Remember, it’s not enough to say that the trend is you friend, but applying this concept in the correct manner is the key.
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