The trend is your friend (it’s your mind that’s the enemy).
We’ve all heard the sayings, “The trend is your friend until the end,” or “A trend is a trend until it bends.” Trading with the trend, in a trending market, can be one of the easiest routes to profitability. Yet many traders are hesitant to participate in today’s historic trending market. There are three distinct possibilities for this behavior—each one based on mind conditions rather than market conditions.
To recognize that we are in one of the largest trending markets in recent history, we need only consider the following: the GBPUSD has cracked 2 and remained there, the USDCAD dropped below parity for the first time in over 30 years, the EURUSD has broken 1.4 with no hesitation, and the records set by Yen-based pairs are too numerous to list. History does repeat itself, but it could be years before we see another market like this one.
So, why do otherwise competent traders hesitate to take advantage of this historic opportunity? Here are three common mind games that keep traders out of the game.
1. Value trading
Many of us started in stocks or futures, where we were taught to buy low and sell high. The lower an equity went, the better it was because it simply went “on sale.” If we liked the idea of Microsoft at 30, we’d love it at 25. In Forex, this mindset can spell trouble on either side of a trade: it allows us to justify adding to a losing position, yet also paralyzes us from adding to a winning one. Applying the “on sale” mentality to a losing position can just increase the size of the loss. And before we can finish saying, “It can’t go down forever,” an innocent swing trade is suddenly transformed into an “investment.” On the other side, we can keep ourselves from adding to a position that’s performing well because we convince ourselves that the high price can’t possibly continue.
Yet if the internet bubble taught us anything, it was that there’s always opportunity in a trending market, even if that trend is upward. During the heyday of internet trading, many of us used a stock system made popular by William O’Neil, founder of Investor’s Business Daily and inventor of the CAN SLIM system. The “N” stood for “new high.” He reasoned that if a stock isn’t making a new 52-week high, then demand for it isn’t as high as it is for other stocks that are making new 52-week highs. After all, if new highs aren’t being formed and routinely broken, there’d be no trend. While this notion of “buy high” can be a tough pill to swallow, it was routinely proven successful during one of the greatest bubbles in modern history. It worked quite well while the bubble was expanding, and it even worked reasonably well during the collapse, since fewer and fewer stocks made new highs. What we learned from this experience, but often forget to apply to Forex, is that it can be just as profitable to “buy high and sell higher.” In fact, value is relative. And it often seems a lot more obvious in hindsight.
2. Trying to pick exact tops and bottoms
Stories of hitting absolute bottoms and tops may sound cool over dinner with friends, or win the praise of others in internet forums. After all, who wouldn’t like a little street cred for accurately picking the most recent highs and lows? This desire can affect beginning and seasoned traders alike. Beginning traders may easily confuse luck for skill, or seek to build their confidence by proving they’re right about the market. Similarly, seasoned professionals may wish to prove their “expertise” in order to sell more products.
However, the only way to pick a bottom or top is to give up on trading with the trend and start guessing when it will reverse. If a trader’s account is big enough and positions small enough, eventually that trader will be able to say he or she predicted the turn correctly. Remember, even a blind squirrel finds a nut every now and then.
3. Fear of ending in a loss
Sadly, all good trends come to an end. In many cases, that last attempt to participate in a trend will end in a loss. Traders reason that the more times they are right, the more likely they are to take a loss as the reversal draws near. As a result, they become increasingly reluctant to participate in established trends. They begin guessing when the trend will be over and, as the trend progresses, they become less and less inclined to trade. Meanwhile, the trend continues on without them.
It really comes down to a risk:reward decision on a macro scale. Will you risk one of your winners for the chance to participate in an unknown number of winners in the future? The way to combat this is to assume that the last winning position will be donated back to the market when the trend is over. If you’ve won three consecutive times, it’s reasonable to assume that you’ll be able to keep two of them. Six wins under your belt, it’s likely you’ll be able to bank at least five of them. This mentality allows us to continue participating in a trend, rather than sitting on the sidelines. If we can resign ourselves to the idea of donating the last trade, we’ll be more likely to continue participating in the trend until it becomes exhausted.
Typically this mindset is not learned overnight. It’s important to continually condition our minds to fear the pain of missing an opportunity, regardless of the actual outcome, more than the pain of a loss. Ultimately, there are two ways we can ingrain this mindset: never become satisfied with the first and easiest trade of a trend, and remember that the trend will continue until it doesn’t. Yes, that sounds corny, but that is how it works. It’s not our job to guess when that end will happen, however it is our responsibility to make ourselves available to the opportunity. And often, the biggest opportunities come when we trade with the trend.
Phil McGrew
We’ve all heard the sayings, “The trend is your friend until the end,” or “A trend is a trend until it bends.” Trading with the trend, in a trending market, can be one of the easiest routes to profitability. Yet many traders are hesitant to participate in today’s historic trending market. There are three distinct possibilities for this behavior—each one based on mind conditions rather than market conditions.
To recognize that we are in one of the largest trending markets in recent history, we need only consider the following: the GBPUSD has cracked 2 and remained there, the USDCAD dropped below parity for the first time in over 30 years, the EURUSD has broken 1.4 with no hesitation, and the records set by Yen-based pairs are too numerous to list. History does repeat itself, but it could be years before we see another market like this one.
So, why do otherwise competent traders hesitate to take advantage of this historic opportunity? Here are three common mind games that keep traders out of the game.
1. Value trading
Many of us started in stocks or futures, where we were taught to buy low and sell high. The lower an equity went, the better it was because it simply went “on sale.” If we liked the idea of Microsoft at 30, we’d love it at 25. In Forex, this mindset can spell trouble on either side of a trade: it allows us to justify adding to a losing position, yet also paralyzes us from adding to a winning one. Applying the “on sale” mentality to a losing position can just increase the size of the loss. And before we can finish saying, “It can’t go down forever,” an innocent swing trade is suddenly transformed into an “investment.” On the other side, we can keep ourselves from adding to a position that’s performing well because we convince ourselves that the high price can’t possibly continue.
Yet if the internet bubble taught us anything, it was that there’s always opportunity in a trending market, even if that trend is upward. During the heyday of internet trading, many of us used a stock system made popular by William O’Neil, founder of Investor’s Business Daily and inventor of the CAN SLIM system. The “N” stood for “new high.” He reasoned that if a stock isn’t making a new 52-week high, then demand for it isn’t as high as it is for other stocks that are making new 52-week highs. After all, if new highs aren’t being formed and routinely broken, there’d be no trend. While this notion of “buy high” can be a tough pill to swallow, it was routinely proven successful during one of the greatest bubbles in modern history. It worked quite well while the bubble was expanding, and it even worked reasonably well during the collapse, since fewer and fewer stocks made new highs. What we learned from this experience, but often forget to apply to Forex, is that it can be just as profitable to “buy high and sell higher.” In fact, value is relative. And it often seems a lot more obvious in hindsight.
2. Trying to pick exact tops and bottoms
Stories of hitting absolute bottoms and tops may sound cool over dinner with friends, or win the praise of others in internet forums. After all, who wouldn’t like a little street cred for accurately picking the most recent highs and lows? This desire can affect beginning and seasoned traders alike. Beginning traders may easily confuse luck for skill, or seek to build their confidence by proving they’re right about the market. Similarly, seasoned professionals may wish to prove their “expertise” in order to sell more products.
However, the only way to pick a bottom or top is to give up on trading with the trend and start guessing when it will reverse. If a trader’s account is big enough and positions small enough, eventually that trader will be able to say he or she predicted the turn correctly. Remember, even a blind squirrel finds a nut every now and then.
3. Fear of ending in a loss
Sadly, all good trends come to an end. In many cases, that last attempt to participate in a trend will end in a loss. Traders reason that the more times they are right, the more likely they are to take a loss as the reversal draws near. As a result, they become increasingly reluctant to participate in established trends. They begin guessing when the trend will be over and, as the trend progresses, they become less and less inclined to trade. Meanwhile, the trend continues on without them.
It really comes down to a risk:reward decision on a macro scale. Will you risk one of your winners for the chance to participate in an unknown number of winners in the future? The way to combat this is to assume that the last winning position will be donated back to the market when the trend is over. If you’ve won three consecutive times, it’s reasonable to assume that you’ll be able to keep two of them. Six wins under your belt, it’s likely you’ll be able to bank at least five of them. This mentality allows us to continue participating in a trend, rather than sitting on the sidelines. If we can resign ourselves to the idea of donating the last trade, we’ll be more likely to continue participating in the trend until it becomes exhausted.
Typically this mindset is not learned overnight. It’s important to continually condition our minds to fear the pain of missing an opportunity, regardless of the actual outcome, more than the pain of a loss. Ultimately, there are two ways we can ingrain this mindset: never become satisfied with the first and easiest trade of a trend, and remember that the trend will continue until it doesn’t. Yes, that sounds corny, but that is how it works. It’s not our job to guess when that end will happen, however it is our responsibility to make ourselves available to the opportunity. And often, the biggest opportunities come when we trade with the trend.
Phil McGrew
