Make Long Trends Your Friend

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Over the last few weeks there have been ‘cries’ of “this can’t go on much longer” and “its a fix” or “who is stupid enough to buy this market” on the various forums I visit daily. These are quote common comments to hear when there has been a continued trend for a while.

The reason being is that traders get in a set mind frame. They usually, either belong in the swing/range bound club and buy and sell oscillators type moves or they believe in trends and they follow their trendlines. Either way the “other” type of market becomes their nemesis. A trend trader will naturally make more losses during range bound markets and visa versa.

In the world of independant day traders there is a definite feeling that traders like to short more than they like to go long. This is in part to the market conditions we have seen for the last decade but also there is a psychological ease of going short. What goes up must come down, right? There is a notion (which may be true in most cases) that down moves are more impulsive than up moves but this assumption is attached to the idea that the fast the move the easier to trade. The fear of being wrong is far greater when going long. You rarely hear of the the investor who $bn wealth had been reduce to millions because of going short (although this is changing). You usually hear about the big hits being taken when markets collapse.

Naturally these psychological issues make it very hard for a trader, especially a new trader to believe a trend can go on.

The key for us small time traders is to have a long memory. The markets events happen every year but yet somehow traders have a selective memory and quickly forget.

Below is a Daily DJIA chart from this time last year.

Below is a Daily DJIA chart from Dec 2010 until yesterday.

As you can see both are strong trends with very little retracements. The majority of days are +ve days. And there is very little sign of it stopping.

Sure, now it is easy to say that a pause or pull back will happen sooner rather than later. But there has been talk across the the forums for weeks now. The markets have risen by another 3% since end of January. Yes they still refuse to accpet the trend.

Naturally, they will be proven right eventualy, however the key is to get it as right as possible and to recognise that you could be wrong. Long trends like these do not have to be your enemy. If they don’t suit your trading systems that is fine. Wait for the market to change again. Spend time developing other strategies. But at the very least do not ignore it and do not forget that it can happen. These trends come round time and time again and they is to make the your friend and not your enemy.

Don’t be one of those traders whining about the ‘FED supporting the market and if it wasn’t for them the market would have collapsed’- we’ve heard it all before. It does not matter why something is happening (most of the time) it is more important to see what is actually happening.

2 Responses

  1. alan says:

    This is a good article to take notice of. The quickest way to blow your pot is to go against the trend. Trying to pick tops or bottoms is a mugs game and its a game I any many others have played with disastrous consequences.
    I you want to trade, do as the pro’s do, find something in a trend and have a system for joining it.
    Nothing has a perfect valuation and things are usually over/under valued before they change direction.
    A market can go up or down for a lot longer than your pot says its going the other way.
    Now did I mention I have some very over priced T Shirts for sale.

  2. forexrate says:

    Good comment Alan.. and great post Jason..

    There have been plenty good quality trend systems published over the years.. Turtle trends springs to mind, but when news is supprting the trend and your overbought/oversold indicators are maxing out.. it really doesn’t mean it’s due a turn.. a lot of the time you get the most pushes in the trend direction when extremes in oscillators happen..

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