Question Everything

In forex, well all markets, we assume that we must always trade with the trend.

Why?

If everyones going with the trend and the average trader is a loser, why would you want to do that?

If price has moved up significantly and looks to be in an uptrend, why would we want to get in? If so we're assuming the trend will continue, who says it will? Given that price only trends 15% of the time, the probability of the trend continuing is pretty unlikely, so what are we doing?

This is a fundamental assumption of most of our trading systems, if it doesn't hold then a revision of our paradigm would be in order.

p.s. if anyones studying this or ideas similar to this (testing fundamental assumptions), please pm me, it'd be nice to collude with others.

I couldn't agree more. The problem with trends are that they are all different depending on what time frame you are looking at. So which one do you follow. You then also have problems identifying whether its a trend change or a retracement. This is also the probem with Elliot waves, you end up with waves within waves within waves and so on! I have spent several years trying to master the art of trading and have finally come to the conclusion that "following the trend" is not an easy thing to do, or even possible?

Are you sure about the causality here? I would contend that the average trader is a loser because he is average not because they follow the trend or not.

I think the statement question everything is spot on. I trade intraday and do not follow a higher time frame trend but there are psychological issues I still come across all the time.

1. I tend to become biased by other trades I have taken that day. If my last trade was a buy I start to look for reasons why this is correct and it becomes harder to take a sell. I have to reset my view of the chart all day long.

2. Riding a sell is harder than a buy. There is something about watching a chart go south that doesn't sit as well for me as watching it go north!!

If you are not trend following I would recommend getting into the mind set of taking profits much more quickly than if you are trend following. Without trend analysis you are saying I think the market will move in my direction now but later who knows because I ultimately don't care.

Happy Trading.

Good to see some responses from like minded people.

I suppose my problem stems from a test I did recently, I wanted to see the effect of the trend so I posed this question to some data.

If I trade with the trend, how much will this increase my probability of a win? (PW for short)

I constructed a trend indicator using fib numbers and SMA's on the daily chart.

i.e.

21 SMA
34 SMA
55 SMA
89 SMA
144 SMA
234 SMA

Then I said, when these all are going up, go long on the open. No stops or targets, I exited at whatever I was on the close of the day.

The results were less than expected, only 51-52% of the trades were winners. I'd like to say our trend bias is 1-2% but thats not hugely significant, I had over 4000 samples of daily data in the test but I can't conclude that that 1-2% is significant.

I also checked to see if maybe trends don't increase your PW, but increase your chances at a BIG win. Again no significance.

I experimented with holding the asset longer than 1 trading day. Maybe it would work better if I held it longer? Gave the market more a chance to continue the trend?

I havn't finished this test, but upon holding the asset for 3 months PW increased to about 65%. However now we have a problem, is the 65% due to the trend or something else? Afterall, we'd expect to stock market to rise over time (more or less), so maybe this is a function of that characteristic and not of our trend indicator. I experimented with a few different holding times, e.g. 1 week, 2 weeks, 1 month and there seemed to be a positive relationship between PW and holding time.

The only reason to trade with the trend is to increase your probability of winning, or the probability of a winning big. If none of these exist during trends, we're barking up the wrong tree.

Buy dips and sell rallies. Don't over-think it. Philosophical exercise is more intellectually than financially rewarding. If some people lose and others profit from trend trading, the question is: why do the losers lose, not: why are the winners so foolhardy. KISS

What we need to look at more I think is what causes or where the price stops trending and reverses. This is where pivot points and round numbers come into it. I am focusing purely on this area now as I found that I was constantly trying to catch a trend, only to see it reverse Forget the different time frames. I trade during the London/US sessions and watch what price is doing in that session with respect to the daily pivots. Take a look, they play out nicely. No TA can predict the price reversal off of a pivot point.

When I started here I truely believed the 'trend is your friend' motto was worth its weight in gold. In my opinion it's not....

I quess my angle would be, why should pivot points and round numbers act as reversal points? i.e. why should people buy or sell here?

"Because I think other people may use the number" isn't really a reason, its an assumption. What research prooves that these numbers are significant?

I think the fact is that they are basic standard calculations that a lot of people use. They are all over the interweb for all to see. I don't know why they work, but they do. Clearly big players use the levels.

Can't get a chart up yet, but look at the EUR/USD today. Daily PP at 1.4087, S1 at 1.4023 and S2 at 1.3949. Now look at what happened at 08:10, then also look at where price reversed at 13:45!