Is the Trend your friend?
The most well-known, but often misunderstood adage in Trading has to be
“The Trend is Your Friend”
No doubt, you have heard that at some point in your trading career or from others who trade, so we thought it would be appropriate for us to take a closer look at this saying and see if it really holds up.
Even though a lot of trading educators and ‘gurus’ tell you to trade with the Trend, they never clearly define a Trend.
OK then, What is a Trend? Well, let’s keep it short and sweet
An Uptrend is defined as series of higher highs and higher lows
A Downtrend is defined as a series of lower lows and lower highs
So when we are trading with the trend we can essentially enter the market using a breakout or pullback strategy.
Now, as we all know Trend Trading works until it doesn’t. Trends don’t last forever, Right?
Martin Pring a renowned author and trader says it the best with his definition of Technical Analysis. He says Technical Analysis is:
“The art of identifying a trend reversal at the earliest stages and then trading in the direction of that trend until the weight of the evidence proves the trend has reversed.”
Okay, but you might be wondering – That’s all fine and dandy but how can I know when the when the Trend has reversed?
Well my good friend, Fear Not – We are here to give you 4 things you can look out for so you can avoid trading with the trend at the wrong times. Sound good? Okay let get to it
Here are 4 Warning Signs that the current Trend may be REVERSING….
1: Price breaks and closes beyond the TRENDLINE
2: Divergence between Price and a Momentum Oscillator such as Stochastic, MacD, and RSI
3: Three Legs in the Direction of the Trend have completed. Trends typically end after three legs in the direction of the trend.
4: Strong Price Rejection evidenced by 1-3 Strong Reversal Candles
So there you have it, now you know what to look out for – you can use these trend busters in your own trading and be way ahead of many traders that just blindly jump aboard any trend without taking the time to dig deeper.