Many traders, believe it or not, aren’t aware of what I am about to tell you. Most beginner traders try to catch tops and bottoms in the market, not even trying to trade the (intra-day) trends. I, like many other traders first starting attempted to do the same thing. I know this from not only my own personal experiences, but by teaching and talking to tens of thousands of traders that they tend to do the same thing. Most traders feel that by trying to catch the top or bottom is really where the real money is. I on the other hand disagree completely. Catching just a little piece of a trend (and sometimes larger than a little piece) adds up, not to mention easier (higher percentages) to do than trying to catch a top or bottom in the market. So, I decided to write a quick and short article on Trend Trading vs. Counter-Trend Trading. I know this will give you more insight into both of these types of trades.
Let me first start out by saying that 90% of all your trades should be those trading with the TREND. The other 10% could potentially constitute COUNTER TREND (CT) trades. Â I would highly suggest concentrating more on the Trend trades as opposed to trying to pick tops and bottoms (CT trades). By not only teaching, but by speaking with students, especially beginners, I find that most traders just try to pick tops and bottoms as opposed to trying to enter the market with the Trend. I will go as far as to say you probably will not make any money by trying to pick tops and bottoms when you first start off trading. Counter-Trend (CT) trading takes a lot more experience. Believe me when I say that you will not only find trading less stressful, but much more rewarding and profitable if you simply stick to trading with the trends. Look to make the small consistent profits with the trends, and of course you will occasionally catch the bigger move.
Of the 10% of trades that are COUNTER TREND (CT) trades, 90% of those trades should be BUYS. Why Buys? Simply put, because I have found that BOTTOMS are much easier to pick than tops. If you think about it, the psychology of most traders are more biased to buying the market as opposed to selling the market as a whole. Traders in general (obviously not all the time) seem to be more optimistic rather than pessimistic on the overall market.Â Believe it or not I have spoken to many futures traders that have told me that they feel more comfortable buying the market as opposed to selling it. I know that sounds ridiculous (especially in futures trading), and I agree, but a lot of traders, feel this way. That is one of the reasons why bottoms are easier to pick than tops – traders are more prone to buy than they are to sell, in general. Think about it, how many stock traders do you know that actually sell a stock short? Â Not many, most stock traders buy stocks in anticipation of higher prices. When the market gets extremely oversold and drops to levels where the big money comes in to Buy the market (oftentimes at a 5%, 10% & 15% overall market corrections), you will oftentimes see the market move higher (spike up) and continue the overall uptrend.
When the market is in a downtrend, the market not only drops three times quicker than it rises (making it much more volatile), but bottoms are put in place much quicker. This is evident in many charts you may look at. On the other hand, when the market is trending up, the market generally moves much slower and much more gradual in nature. Therefore, trying to find market tops are much more difficult to do, at least that has been my own personal experience. So, when attempting to BUY on a Retest of a Low (important), the market is generally in a Downtrend, and when attempting to SELL on a Retest of a High (important), the market is generally in an Uptrend. By knowing these two simple rules will help make Counter-Trend trading much more predictable in nature, rather than trying to BUY when the market is in a free-fall, or trying to SELL when the market is going to the moon. At most, these rules will prevent a trader from jumping in front of a freight train. Therefore, I suggest waiting for a RETEST OF A HIGH before looking to go Short. Conversely, always wait for a RETEST OF A LOW before looking to go Long. Remember, Counter-Trend Trades Should Only Constitute As Roughly 10% Of Your overall Trades. As mentioned before, CT trades are definitely more difficult than trading with theÂ trends.
A General Rule Of Thumb: When a market is Trending Up, the market tends to be a lot less volatile than when a market is Trending Down. Therefore, generally speaking a Down Trending market is much more volatile than when a market is trending up. A market falls roughly three times quicker than it rises.
â€¢ 90% Of All Your Trades Should Be With The Trend
â€¢ The Other 10% Of Your Trades Should Be Counter-Trend (CT) Trades
I suggest NOT trading Counter-Trend (CT) trades until you have more experience trading the markets and become quick with your decision making skills.