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The Great Trend Trading Debate

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Sam Evans
Instructor

This week, I would like to cut right to the chase and dive into a topic which is probably one of the most discussed and highlighted in circles of Forex trading education, namely the subject of trend trading. As regular readers of these articles will know, this is certainly not the first time I have written about this topic and I know it won’t be last as it really is too important to ignore. You can pick up any book or view any website on the subject of FX trading and the vast majority will all tell you the very same thing: The Trend is Your Friend. The basic trading mantra across the board always tell us that the safest and best way to trade is to look for directional momentum and simply follow it. My question then is to ask, if trend trading is so simple and offers such great trading opportunities, why then do so many traders attempt to follow trend and struggle with losses and lack of consistent profits? I am sure you have the same questions too, so let’s explore it further.

Free Trading WorkshopAt first glance, the concept of trend following makes plenty of sense on paper. Look at any price chart of the worldwide equity markets over the last 50 years and you will see that they are clearly higher now than they were then. In the longer term markets do tend to rally, but they certainly don’t do it in a straight line, do they? When a major 40% correction occurs, trust me, the uptrend is always a distant memory to those who are buying! Take this thinking to the global currency markets and you will see that these asset classes don’t trend anywhere near as much as stocks do; so there is an even greater need to be non-directionally biased when looking for trading opportunities. After all, it’s really not hard to buy and hold something while watching it make money when the market is going only one way, is it? Like I said, if it was as easy as that, then everyone trading would be making more money than they would know what to do with.

Taking the concept of trend trading a stage further, let’s also apply some basic logic to the idea of trend. Trend is, by definition, a description of current market direction that has already happened. Therefore, when we attempt to join a trend, we are making the assumption that something which has already been happening is going to continue to happen for even longer. Ever heard the saying that nothing will last forever? Well, in today’s currency markets the same idea holds true. Putting your hard earned money into a market hoping that it will continue in the current direction means that the odds are steadily stacking up against us over time, as probability is decreasing that the trend will continue. Instead of relying on trend to work for profits, how powerful would it be to understand how to time the markets through buying and selling in areas where new trends are likely to start, instead of joining ones that are coming to the end of their runs? By understanding where major banks are buying and selling, we can attempt to do this with very low risk and high potential rewards. It all comes down to recognizing imbalances between Institutional Supply and Demand so we can time the markets to buy and sell alongside the big players, rather than against them.Tweet: http://ctt.ec/VWw27+ buy and sell alongside the big players, rather than against them.

The more you understand how the banks do business, the less you start to rely on trend and instead see trading and investing opportunities in a very different light. Let’s dive into a very recent XLT Live trading and analysis FX session I held on the Sunday open. During a typical session we will look at as many trading opportunities as the 2-hour session allows, some of which are for longer-term setups with others on the short-term income side. As long as the reward to risk ratio is solid, we simply find our levels and get to work trading them if our plans allow. In this session we had 2 setups in particular which looked good for an entry, one long on the GBPUSD and the other a longer play short of the AUDUSD.

Take a look at the charts below for screenshots of the live setups we had:

Why you are making profits from trend trading.

Why market timing is a more profitable trading strategy than trend trading.

If you notice on these trading charts, both markets were at face value, in upward trends. The GBPUSD had a quality level of demand below current price where we were looking to buy, which many would say was with the trend and the chart at the bottom shows a sell short at supply on AUDUSD, against the trend according to most. Both setups have at least 3 profit targets. Once the levels are found, risk is defined and the targets set, we place the trades and go do something else.

As mentioned, these trades were identified on the Sunday opening session, which in FX is around 10pm London time or 5pm New York. The great thing about setting and forgetting trades is that once the orders are in you have the flexibility to leave the plan to play out, watching it playout often leads to one getting in the way emotionally.

This is how things played out over the next few days:

Forex chart example - trend trading vs. market timing

As we can see, the GBPUSD did hit and has currently produced a nice bounce for around 4:1 after hitting the first target. This is more of a with the trend trade. The anti-trend trade on the AUDUSD however, moved even further than 4:1 and hit target 1 also, still being in play for its much lower longer term targets even though it was arguably counter-trend, as we can see below:

Forex chart - supply and demand vs. trend trading

So my take on trend trading is clear: trend really doesn’t matter if you have a plan, know where it makes sense to buy and sell and the reward to risk ratios are good enough. You can spend your time focusing on what has already happened or, instead, you can plan out trading opportunities for what is likely to happen next. Knowing how to time the markets will always give you the very best chance to buy and sell with the biggest banks in the markets; and these are the forces that create every trend in the markets, and also ends them too. Which side of the market would you rather be on? I hope this was helpful!

Be well and take care,

Sam Evans – sevans@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.