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TRADING AGAINST THE TREND.docx 21

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									                                       TRADING AGAINST THE TREND




         TRADING AGAINST THE TREND

I am aware there is an inherent appeal among many
traders to at least occasionally trade against
the trend. I believe the primary reason for this is the
illusion of an "attractive" price. A market
that has been going down for ten weeks or more, or
a market that is below its price of ten weeks
ago, by definition is going to have a relatively "low"
price. This "low" price will frequently look
attractive to buy (and, of course, when the trend is up and
the price is "high" it will look

attractive to sell). Prices that have been in long
lasting downtrends will always appear cheap
or low; and prices that have been going up for a long
time will always look expensive or high.
The danger of these seemingly attractive prices is the
second law of trading: Continuation is
more likely than change. In this game, "high" tends to
indicate even higher and "low" usually
means even lower—regardless of past history.
Unfortunately for my net worth, over many of my early
years of trading I made far too many
against-the-trend trades. While I have not kept records, I
have absolutely no doubt I lost far more
on these against-the-trend trades than I made (even
though I have made some great against-trend
trades). I believe the same is probably true for
most traders. However, even more damaging than
the amount lost on against-the-trend trades were the
profits not realized due to missing good
with-the-trend trades. Far too often, trading against the
trend misdirected my focus, and as a
result I missed numerous excellent entry points for very
profitable with-the-trend trades.
I believe one of the worst things that can happen to a
trader, especially a beginning trader, is to
make a profitable against-the-trend trade. This good
result will make him or her want to do tradeagainst-the-
trend again. It is the equivalent of hitting a hundred-to-
one shot your first trip to the
race track. This would tend to make you think betting
long shots is a good way to win, when in
reality it is a path to almost certain failure.
Against-the-trend trading has a tendency to be addictive;
the more you do it the more you
want to do it. One reason for this is that when an against-
the-trend trade starts out a loser, a
trader's initial reaction is that he was just a little "early"
on his timing. Therefore, there is a
strong temptation to try again and buy or sell more at
what now has become an even "more
attractive" price.
One of the few "never, never" rules of trading is to never,
never add to a loser if it is against
the trend. Adding to an against-the-trend loser is just
stubborn fighting the market, i.e., the
prevailing price energy flow. It is trying to impose your
will on the market. Furthermore, it is
acting in direct opposition to natural law. Adding to an
against-the-trend loser is simply
allowing self-righteous stubbornness to rule rather than
humble intelligence. Better to surrender
and win than fight and lose.
Since many very bad things can happen to you when you
trade against the trend, it is better to
just not do so. Act intelligently (meaning act in
accordance with the natural laws of trading) and
do not trade against the trend (with the exception of those
rare times the margin-of-error permits,
and even then only if other indicators strongly support
doing so). It has taken me a long time to
fully accept this truth, even though I "knew" it to be true
early in my trading career. Even now,
knowing what I know, occasionally I am tempted to
make against-the-trend trades. "Knowing"
truth is not enough; you must also consistently act in
accordance with this truth.
Now, having said all this—in other words, argued as
strongly as possible against trading against
the trend—I am a realist, and thus aware you may choose
to disregard this advice from time to
time. Therefore, if you insist on trading against the trend,
here are some basic rules for doing so.

								
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