In my trading, I keep my countertrend trades to less than 10% of my total trades. In other words, I am trading with the trend 90% of the time. There are several reasons for this, the most obvious is that trading with the trend is consistently profitable. Conversely, trying to initiate countertrend trades generally results in disastrous and unprofitable results. Yet I consistently see traders attempting to buck the trend when they see what appears to be an excellent countertrend trade set up. Generally speaking, these trades start toward the countertrend trade side, and then resume back in the direction of the trend. It takes real discipline to ignore nice countertrend trade setups because they are enticing, they are also poison.
Scientific analysis from a number of sources reveal that future prices have a strong random component accompanied by a small trending component. The ramifications for this statement suggests that any trade not in the direction of the trend stands a less than average chance of success. The lesson is a simple one; when prices are trending upwards you should buy; and when prices are trending downwards you should go short. This explanation seems simplistic but the tremendous number of traders who violate the simple precept is staggering. It would seem intrinsically obvious to the casual observer that trading in the direction of the trend simply make sense.
I don’t have a scientific reason why people violate trading with the trend, only my own subjective observations. Most traders use some form of methodology involving oscillators and rate of change indicators and very often during a trend these indicators will indicate a buy/sell signal against the trend. Since most traders trust their indicators, they tend to take the indicated trade even though it is against the trend. Bad mistake. Oscillators and rate of change indicators do not differentiate trending and non-trending markets. They simply take into account specific price action and display the results. So often you’ll see a oscillator indicated trade against the trend, and you have to learn to ignore this buy/sell indicator. In reality, it is no simple task and takes a high degree of self-discipline.
Other traders pride themselves on identifying market peaks and market troughs. If you think about it, this trading is predictive in nature. As I have stated in many articles, the randomness component in futures trading makes any futures market predictions a low probability proposition. I preach trading in a reactive faction, which means identifying trends and taking trades in the direction of the trend. It only makes sense. In my opinion, the only truly successful futures traders always trade in the direction of the trend. But back to our predictive traders, there is certainly no shortage of vendors hawking the latest predictive mechanism which will enable traders to spot market peaks and troughs. Usually these products fall to the wayside in short order. Here is the problem; certain techniques work under finite market conditions, but the market is a creature of many moods and predictive techniques are unable to adjust to the many market conditions that occur. Quite simply, there is no predicting what the market will do and anyone who claims they have figured out, in a predictive sense, where the market is headed is simply wrong. It’s never been done, and scientific evidence suggests it cannot be done.
The results speak for themselves, and trend following is one of the few valid methods for real profits in the futures market. Once a trend is identified, a trader can use his oscillators or other indicators to find a valid entry point and generally do very well. One nice and profitable result of trend following is the ability to let your profits run. If the market is headed in one direction, stay with the trade. There will be periodic retracements in any trend, and they are to be expected. But don’t be fooled by these retracements, as a trending market will resume its original trend after a short retracement period. In my opinion, traders who are enticed into trading the retracements are convinced the trend has changed, only to find out exactly the opposite. Trading retracements is dicey business, and I avoid it.