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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