Trading With the Trend
By Cliff Clark
A few weeks ago I wrote a short article about trading with the trend. Unfortunately I still see traders make the same mistakes on an almost daily basis. They think just because a stock is gapping up big they have to fade it. Folks, this kind of thinking is going to put you out of business pretty quickly. Yes, some gaps can and should be faded but you have to learn when it's the right time to make those plays.
To start with let's make sure we have a basic understanding of what a trend actually is.
As you probably know, security prices are formed by the interaction of supply and demand. When one outweighs the other, prices will tend move in that direction. Whenever demand outweighs supply (or supply outweighs demand) over an extended period of time, we can say that we have a trend in prices. Pretty simple right?
In order to capitalize on these price trends, traders use trade setups that look to take advantage of the tendency prices have to move in the general direction of the trend. Such setups are called trend following, as they suggest taking a position in the general direction of the trend. There are setups that allow a trader the opportunity to capitalize on price movements against the trend, counter trend setups (or fading). But since prices in a trending environment spend the majority of their time moving in the general direction of the trend, these counter-trend setups should be applied sparingly, and only under the right higher odd circumstances. Now all of that sounds simple, right? Well, it is simple in theory. But we trade in real life we don't trade in theory and there are factors that can complicate matters wreaking havoc on a traders performance and psyche.
Most traders bring beliefs to the markets that are clearly detrimental to their performance. They think the price of a stock acts as a rubber ball which bounces after being dropped to the floor. They also think that whenever something gets too high it has to come down. These beliefs play tricks in the trader's mind, not allowing him to recognize and analyze the objective development of prices over time. These traders will often unconsciously allow these beliefs to affect their trading decisions, ultimately entering into stocks that quickly move against them, causing several needless losses and possibly “psychological damage”.
Trading in the general direction of the trend is the higher odds approach to trading the markets. When you build your trading plan, make it a point to clearly describe the trend environment you want to have in order to place a trade. Then make a conscious effort to only take trades that are targeted to follow the current trend. Why did a make unconsciously and psychological damage bold text above? Because having a trading plan that you have confidence in will allow you to make far few unconscious mistakes. Trade like this and you will see a vast improvement in your results.
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
