Trend is your friend....but for how long?

Trend is your friend....but for how long?

Let’s talk about trends! I’m going to share my experience and to speak about common mistakes of beginner traders. I hope this read will provide you with a deeper understanding of what a trend is, how to work with it and what market entry and exit points are.

 

Just like many of those who are at an early stage of their trading career, I’d been reading various books devoted to the technical analysis of price charts. I read quite a lot of those, and only a few skipped a concept of “trend trading”. “Follow the trend”, “the trend is your friend”, “buy if the price grows and sell if it falls” - these were the most popular tips by the authors of those books. However, when trying to use the tips, I inevitably got disappointed (blink twice if you’ve recognized yourself): as soon as I entered the market on the trend, I got kicked out by Stop Loss. But once I got kicked out by Stop Loss, the trend immediately re-established itself in the direction I had bet on.

What’s the matter then? Are all these trading and investment best-sellers really useless when learning how to trade at Forex? Such was my next conclusion, but in reality, all was much deeper and more complicated.

 

1. Start of the route and traders’ main mistake

This article deals with a Forex trader’s typical mistake called “market opinion”.

When a beginner Forex trader reads that “a probability of trend continuation is higher that a probability of trend change”, he/she gets an oversimplified idea of what is going on because of lack of experience. He/she starts thinking that if the trend is upward, the price will continue rising, and if the trend is downward, the price will continue falling. The word “probability” is slightly ignored at the beginning, and then it’s just completely forgotten as useless.

Why?

Just because we are all looking for the wrong thing: we’re looking for a final answer, the truth, or, as they say, the Grail of the Forex market that will tell us what the price will do next. We feel that we don’t know much about the subject and therefore we strive for more certainty. A typical thought that appears after a series of loss-making trades sounds like “If I enter on the trend and get kicked out by Stop Loss, I don’t define the trend correctly”. Familiar thought, isn’t it? It is, of course. At this very moment, 2 erroneous assumptions are inevitable made: “I cannot earn because I don’t understand where the price will be moving to” and, consequently, “I have to learn to understand where it will be moving to”.

At first, we are all looking for the wrong thing: we’re looking for a final answer, the truth, or, as they say, the Grail of the Forex market that will tell us what the price will do next.

 

2. What a trader really wants

Some choose to create an indicator strategy (like me some time ago) and to adjust indicator parameters so that they predict the price behaviour based on the trade history. When I succeeded in that, trading became more comfortable, but only until the first series of loss-making trades. Some can get interested in Forex market analyses or even may want to have training in the foreign exchange market with various traders in the hope of learning to define price directions. Unfortunately, nothing of the things above can offer what a beginner trader is looking for: there’s no only correct approach to analysis, or magic price pattern after which the price will certainly move in the right direction, or a perfect and faultless trading strategy with 100% profit probability and 9999% profitability per day. Just because it’s impossible.

Now let’s go more concrete. To predict a price direction, it’s necessary to get to know neither more nor less than all trading decisions by all market participants for the nearest future. Without even mentioning force majeure events, such as hurricanes, earthquakes or unexpected political decisions (for instance, recent Brexit) that can immediately change intentions of recently surveyed traders. However, the Forex market if too big and there are too many participants, while sudden political decisions or natural calamities are simply unpredictable.

To predict a price direction, it’s necessary to get to know neither more nor less than all trading decisions by all market participants for the nearest future.

So, one may wonder how indicators, price charts, analytical forecasts or anything else can help a trader define where the price will go. How can we suppose that indicators, price charts, or forecasts can inform us about ALL traders’ intentions for the nearest instant (remembering about hurricanes and earthquakes)? What can prevent market participants from considering GBP/USD 1.50000 to be too high for the currency of the country that decided to leave the EU in June 2016? An upward trend?

This article contains more questions than answers. The faster a trader asks them, the shorter his/her development way to a Forex professional will be.

 

3. Identity of patterns or why the price went the wrong way

So, what shall we be looking for then and how to earn from Forex? I was extremely enraged when other traders said things like “no one knows where the price will move” and, what’s more, “one does not need to know where the price will move in order to earn”. I thought they were kidding and didn’t want to share their secrets :) But I got it in due course.

The most important knowledge any beginner trader has to accept as soon as possible is that the price can move anywhere at any moment: any trend can change in a second, any strong support/resistance level can be broken, any market conditions can change in a moment. However, this doesn’t mean we must always fear to get kicked out of a trade ;) We simply have to accept the fact there is no and there cannot be any certainty about price directions. The same price pattern can bring about an upward movement today and a downward movement tomorrow.

But in the first case, it’s “Wow, Head and Shoulders, I’m a super trader”, and in the second case  - “damn! Head and Shoulders...I must have defined it wrong”. And our mind refuses to think the pattern is the same and different price directions are normal.

We simply have to accept the fact there is no and there cannot be any certainty about price directions. The same price pattern can bring about an upward movement today and a downward movement tomorrow.

If we understand there is no and there cannot be any certainty about price directions, the next important conclusion suggests itself: there’s no only correct true approach, “ultimate trading strategy”, or “ideal method” because any of those will give rise to loss-making trades under market conditions of uncertainty (which is normal as well).

 

4. Entry point vs. Exit point

There was one more phrase disturbing me: “An entry point does not have any importance, an exit point does”. What?? Sounds crazy, right?

Because we instantly imagine a situation where a trader buys in any place, without understanding why and what for, and waits till his/her position grows profitable (if it does). What does it have to do with profitable trading? Nothing, of course. The phrase means something absolutely different.

The unimportance of an entry point and the importance of an exit point mean that both me and you, reading this article, can enter opposite trades at the same price and make a profit.  How? We can trade on different time-frames:

The unimportance of an entry point and the importance of an exit point mean that both me and you can enter opposite trades at the same price and make a profit just because we trade on different time-frames.

A green triangle marks the place where we entered a trade: for example, you bought and I sold. You bought because you entered from the demand zone, from where the price had grown earlier.  If the price drops below this zone, the zone will no longer be active and your scenario won’t prove to be correct. That’s why your Stop Loss is placed exactly under this zone (lower red line). Your objective is the opposite zone (marked with a blue line above), and we see that your position has been closed with a profit and the trade correlation is 3/1. Congratulations!

I sold because I had seen a false level breakout: the price attempted to rise further but didn’t manage to. Fearing that an upward retracement may not happen, I sold with a market order (right to you). At the same time, I understand that “something” pushed the price back to the level and my Stop Loss will be right beyond the point from which the price reversed down (the red line above). If the price moves higher, I’ll understand that market conditions have changed. At the same time, my profit goal is near the source of the global upward movement (lower blue line) - right from where the price was pushed upwards, and exactly there increased demand may occur again. As we can see, my position is closed with a profit too and the correlation is almost the same: 3/1.

So, which of us is right in this case at the moment of entering a trade? =) Did the price move up or down?

If we summarize the messages set out in this article, we’ll understand that a desire to know where the price will go will only lead us to deadlock as we will always lack some information for the above reasons. We only need to know how acceptable current trade conditions are in terms of risk and potential according to our vision of the market, which, alas, needs to be developed independently.

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