CHAPTER
6
Trading with the Trend
M
ore money probably is lost in trading by people fighting the trend and trying to pick tops and bottoms than for any other reason. Traders need to remember the old adage “The trend is your friend” and try to trade with it. Trades that have the highest probability of working are usually in the direction of the trend; fighting the trend means fighting the market’s momentum. A trend is in place for a reason: The market participants as a whole believe that the market should be headed in that direction. When this is the case, it is wise to be on the side of the momentum, not against it. Unfortunately, people’s psychology leads many to try to catch tops and bottoms throughout a trend, as they believe the market has already moved too much.
WHAT IS A TREND? The basic definition of a trend is that in an uptrending market (downtrends are just the opposite) the market will move in a series of upwaves that make higher highs, with any downwaves considered countermoves and not dropping below previous lows. The upwaves will be longer than the countermoves and will move with more momentum. A characteristic of a trending market is that the closes are near the high of the bars in an uptrend and are near the low of the bars in a downtrend. The stronger the trend is, the closer to the extremes the closes will be. 96
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