Surely if you have read books about trading you have heard many times that the trend is your friend.
This is something that you will also find in most of the trading books, especially the classic ones.
But why is this concept of the trend so important?
Well, because most of the markets move in trend and that trend is what allows us to earn money.
Obviously, if we have a flat market, without a trend, we cannot earn money by investing, it is understood, unless the asset has strong coupons, such as bonds.
However, when we talk about the trend is your friend, we do it from the point of view of investment and trading; especially the latter, since his life depends on it.
The importance of the trend in trading
Before you start trading, you should have one thing clear:
What are you going to negotiate?
If you are going to negotiate shares, you should study or know how their prices work. That is, on what they depend.
Not only that, but you will also study the historical prices to know what has happened before.
In the case of stocks, you will see that they respond to stimuli called “profits”.
Those gains are what are providing the blood to the economic trading system.
As you will understand, the shares belong to the most successful companies in the market, both nationally and internationally, with which it would be logical that these actions have to go up in price, as long as that business is behaving well.
The fact well known by all the experts and not so experts is that a good group of global actions tends to have an upward bias, in such a way that the long-term tendency of them is to rise.
That is the reflection that the company is doing well and that, therefore, it increases its price in the long term, because each time it is a bigger or more efficient company and earns more.
It is there, in the stocks, where we see the clearest example that “the trend is your friend”.
If we have this clear we should know that the most advisable, then, is to operate in the stock markets on the rise, even though in the intermediate periods there are always bear markets, some even of great importance as the collapse of the Nasdaq bubble for example.
That said, we also have to be clear that the trend is not guaranteed for all stocks, nor all the assets, but if we look at the world’s stock market in the world, with its indexes (start chart), we will find out that in an aggregate way the best thing is to follow the trend in that market: which is bullish.
However, the theme of the trend is much more complicated than this.
In fact, so complicated that following the trend is something that we can also do in bear markets of shares, which seems to contradict what I just said.
This is where the concept of the periods to analyze comes in.
Of course, the primary period, so to speak, that of decades or centuries, is that of a bull market.
The secondary and tertiary periods are already more variable, being able to be bullish or bearish, and both having an underlying tendency.
In that sense you would have to study how to apply the appropriate trend techniques to be able to take advantage of the market in those situations.
But I’m telling you that the more you reduce the more complicated period, the operative will be.
In fact, you should not go to very short periods because then you will suffer a lot.
The trend is your friend in other instruments
When we talk about other markets, things get pretty complicated.
Because the other markets, such as Forex, commodities or even cryptocurrencies, do not have the same dynamism as the stock market.
It is not that they do not have any dynamism or a “tendency to rise” as a consequence of living in an inflationary world, but that the dynamism is not the same one that serves to explain the long-term growth of the stock markets.
The cryptocurrencies still cannot be compared to that because they are just in their first years of testing, and I think they have a series of intrinsic problems that will make it very difficult to maintain the dynamism of the market in the long term.
Raw materials also have a tendency to rise in price in the long term, so that like stocks, “the trend is your friend” would tell us that the best thing is to trade upwards in them.
However, the strength of this trend is not the same as what we can find in the stock markets, especially in the individual values of the same.
Assets such as oil, gold or copper, for example, continue to give us good examples of “the trend is your friend”.
The problem of the trend is your friend with the Forex
Of all these assets is the Forex, undoubtedly the most problematic, because, especially in large pairs, we see that the long-term trend is not so clear, since we have two economic blocks with their respective currencies fluctuating but without giving us a “long-term image” as clear as we have it with actions.
We see this perfectly in pairs like the EURUSD, the GBPUSD or the EURAUD, where we will not have anything easy to determine which side of the market we are most interested in negotiating.
In fact, here we can fall into the trap of following the trend and find ourselves with the unpleasant surprise that it has ended for a long time.
For example, imagine that you are in the year 2001 in the EURUSD and after many years of bear market you say “the trend is your friend”; we are going to negotiate shorts.
Well, in that case you found yourself with the end of the trend and an opposite market of seven years.
In 2007, the same thing would happen.
After deciding to negotiate upwards because “the trend is your friend”, you find yourself with a wall and a brutal fall of the EURUSD, with many years not only of bearish tendency, but also lateral, in an extremely complicated market.
With this example we have to see clearly one thing.
In the Forex, especially in the big pairs, the long term concept of the “trend is your friend” does not serve much, and we will have to look for those moments of trend more short term, so to speak.
For example, we are in 2002 with the EURUSD price at 0.82.
Instead of rushing to negotiate downwards “following the trend”, we decided to wait and look for the change of trend, or what is the same: the beginning of the next big trend.
If we have enough patience and we wait for the market to turn around and overcome that great long-term resistance of almost secular nature, then we will have a good opportunity to catch a good trend of years.
We can even have luck and it happens like that occasion, when the market started a big bull market a little later, and after exceeding 0.95 it spent many years with strength on the side of the bulls.
This example can help us to see a way to deal with all markets, because this type of change usually happens in all assets, whether raw materials, stocks or even bonds.
Therefore, sometimes, rather than looking for the “trend is your friend” and operate the same “without rhyme or reason”, we would do well to look for advantageous situations for us, as the indicated example.
Is it easy to trade the trend?
Only with “knowing” that the trend is your friend will not be enough to dominate the beast of the market.
The obstacles we have to apply good trend trading strategies are many.
To start: ourselves.
Most people try to apply trading strategies that consist of cutting losses quickly, just the opposite that says that other axiom of trading: “let the profits run.”
In fact, it is in the concept of tendency where the previous saying of running the gains reaches the greatest importance.
What better than to let the profits run in a market with a strong tendency?
Of course, it is not the type of market in which you are interested in taking a profit of one point.
However, traders who can do that are very few.
Then we have the problem of day trading, in which many fall thinking that they can operate the “trend” in that way, when in fact it is something practically impossible as I mentioned in an article years ago.
Derivative contracts and the trend
Derivatives contracts, friends of the trader, are also your worst enemies.
This happens because of the “haste” problem of the trader.
When we give those leverages of 10, 20 or 50, we see the possibility of trading in these markets assuming that using such leverage we will be able to take advantage of our knowledge of trend trading.
This has a problem.
For example, imagine that the trader has 1,000 euros and wants to negotiate the CFD of the DAX, which is about 12,000 euros, or that the trader has 10,000 euros and wants to negotiate the future which is 240,000 euros nominal.
This is where the trap comes from.
As we can operate those contracts, we tend to do it in a too reckless way, with too tight stops, which is the only way in which we can operate those assets with those margins without it being prohibitive.
In the first case, if the DAX moves 1%, we will have won or lost 120 euros, no less than 12% of the 1,000 account.
For that reason, traders look for something more assimilable, like a stop of 20 euros, thinking that this way we can take advantage of the trend.
The fact is that this is very complicated to work because markets are too nervous in the short term, and the number of times you will lose 20 euros are so many that even with good trend techniques you can overcome the trauma.
Here you will have to spin very thin to be able to defeat the enemy.
The best, on the contrary, would be to negotiate in a different way.
That is, in a way that provides us with a more “quiet” trading that avoid that market nervousness, and therefore looking for higher stop levels.
In the first case – the second with the futures would be even worse – we would do better to look for an asset with less nominal, such as a CFD of the SP500, with a value of 2,700 dollars, which would allow us to look for more baggy stops, and that in the long run will serve us better in our trend strategy.
With this it seems that we lose purchasing power and we do not take advantage of the leverage, but believe me, it is the best we can do for our portfolio.
Anyway, you better be clear, that operating the trend is the best you can do.
If they say it, it’s because of something.
Original article: La tendencia es tu amiga ¿Verdad o mentira?