Day trading: the trend is your friend

“The trend is your friend” is a motto you often hear in the investing world. For day trading, trading or speculating with the trend is almost a given. Why is that anyway?

What is trading with the trend?

A trend is the continuation of a certain movement of price in one direction, or a tendency for something to move in a certain direction. This effect is essential during day trading. This indicates that when price is in a certain trend, it tends to move in that direction. There is also an opposite of the trend, namely countertrend (against the trend). This means that you are trading on a change in the trend. When countertrend happens, a new opposite trend forms . Trends can be either upward (uptrend) or downward (downtrend).

Uptrend and downtrend

Uptrend

An uptrend leads to higher peaks and higher troughs in price. One can also turn this around, one can say that when a trough is overshadowed by a lower trough in price, it is no longer an uptrend. This makes good use of cause and effect to create a definition of an uptrend.

Downtrend

The same can be done with a downtrend. When a downtrend is taking place, one sees lower lows and lower highs. According to this definition, when a peak is overtaken by a higher peak, a trend change can be expected.

Other definitions of trend

Another way to divide price into two forms of opposites is trend and consolidation . However, consolidation is not the same as countertrend. Consolidation refers to the period in which price hardly trends, up or down, but moves back and forth within a certain range of price. this is also called oscillation . Trend and consolidation follow each other. After a longer period of consolidation, the expectation is that the price will explode upwards or downwards, or in other words, seek out a new trend. The guideline is that the market is 80% in consolidation and 20% in a trend-seeking period.

Trend vs countertrend trading

Trend trading is generally a better form of trading than countertrend. This follows from principles of technical analysis and money management . While the market only trends 20% of the time. Yet technical analysis is seen by many as a voodoo art. Money management is considered more useful because it is also used by fundamental analysts. However, both are not always respected. This is not a surprising development, because technical analysis and money management are not exact sciences. It is the intrinsic weakness that both have. The way in which one can determine whether technical analysis and money management are useful is not through hard facts and formulas, but through statistics (probability calculation) and logical deduction .

Statistics

What do the statistics say about the market in terms of trends? This makes a positive contribution: trend opportunities are much more common than countertrend opportunities. It is rare for a trend to simply turn into an aggressive opposite trend. It is also the case that in cases where a countertrend opportunity does occur, in 85% of the cases there is at least a double top/bottom style. A double top/bottom means that the high or low point of a support or resistance line is visited twice. It can therefore be said that trading with the trend is more advantageous in terms of profit potential than countertrend trading. However, statistics are fallible. For statistics, one randomized data set is used to make a prediction about the average. This works well until the current data set is completely different from the data set used. Therefore, the ability of logical deduction is very useful.

With trend: unlimited profit potential – Countertrend: when the trend remains intact, the profit potential is limited

Logical deduction

What does logical deduction say about trends? This one is also positive. According to the aforementioned definition of a trend, a trend remains a trend until it tends to change. Therefore, when a trend holds, the profit potential is theoretically unlimited . On the other hand, if you make a countertrend trade, you have a limited profit potential if the trend remains intact. In general, it is rare for a trend to perform a 100% pullback , so the profit potential along the trend is even greater. Logical deduction indicates that trading with the trend has another advantage. The placement of the stop loss . If you trade with the trend, you immediately know where to place the stop-loss. Namely just below the price of the last trough in an uptrend, or above the highest peak in a downtrend. Where do you set the stop-loss for countertrend? Just in “the middle of nowhere”. It is therefore more logical to trade with the trend according to money management principles.

With trend: stop-loss can be placed more logically

Conclusion

In short, what are the advantages of trend trading?

  • Greater profit potential
  • Potentially smaller stop-loss

The conclusion is therefore that trading with the trend is a better choice than trading against the trend. There is something that should not be forgotten. Since technical analysis is not a hard science, no one can guarantee that no profit is possible by trading against the trend. Trading, and day trading in particular, largely depends on how prices move . This is the element of luck present in the stock markets. The most important thing is to implement a systematic and complete trade plan.