“The Trend is your Friend” Strategy – Let’s make friends
How many times did you hear the words “The trend is your friend”? A lot of times, I bet. But to be honest most of the so called “gurus” out there just drop those words and don’t take the time to really explain what exactly it means and how to get some money from our best friend, the trend. Well, no more! Today I am going to introduce you to more than one way of cashing in on a trend and of course, how to correctly identify one. Also, you probably heard me say that you should never base your trading decision on a single indicator or tool. Guess what: we are going to cover that as well. But first and foremost, we must identify the trend. Here we go:
An uptrend is characterized by Higher Highs and Higher Lows. Not too complicated, I would say. Picture coming up:
This, my friends is an uptrend; every new high/top/peak or whatever you want to call it is higher than the previous and the new lows/bottoms are higher than the previous. Price is moving up in an uptrend.
A downtrend is defined by Lower Highs and Lower Lows, the opposite of an uptrend:
Once we see Lower Lows and Lower Highs, a downtrend is forming. Now to trade a trend, we must draw trend lines, one of the most underutilized technical analysis tool, but one of the most useful.
To draw a trend line, all we have to do is to connect two Higher Lows in an uptrend or two Lower Highs in a downtrend. In an uptrend we connect the Lows and in a downtrend we connect the Highs. Need picture, right? Coming up:
Ok, after the first two points are connected with a line, we start “fishing”. The third touch (and the ones that follow) can be traded in the direction of the trend as long as we have another indication(s) that price will bounce from that point. But what other indication…hmmm let’s look at the tools that we learned about so far and let’s try one.
Combining the Trend line with Japanese candlesticks:
Oh, what a nice Pinocchio/Pin bar. I surely cannot let that one go by. It’s a great rejection/reversal candle combined with the downtrend and a bounce from our trend line. Easy money from my best friend, The Trend and his buddy, Pinocchio. Here’s another one:
The first two Lows help us draw the trend line and then we can trade any Japanese candlestick formation that touches or comes very close to it. In this case, we had two good trades signaled by an Engulfing pattern and a Pinocchio/Pin bar.
Combining the Trend line with Divergence
In this example, when the trend line is touched the third time, I can clearly see Hidden Bearish Divergence, with price making a Lower High and RSI printing a Higher High. My Put in this case works like a charm and price immediately drops like a rock. On top of the Divergence, I also have a Pin bar on the trend line, giving me even more confidence in the trade.
Combining the trend line with Fibonacci
Hello Mr. Fibonacci! My bounce from the trend line is sustained by a test of the 61.8 Fibonacci level. Another great trade where my best friend, the trend puts some money in my pocket.
Why does “The Trend is your Friend” Strategy Suck?
The market is designed to shake our confidence, eat away at our discipline and take money out of our pockets. It also doesn’t always behave like we would expect it to and a trend line combined with 10 more tools or indicators is no match for its erratic movement. Sometimes price will go through it like a hot knife through butter and after our option expires, it will reverse just to laugh in our face. Unfortunately, we cannot avoid that and we must do our best to take good entries, in line with the trend, but remember that even the best friends suck sometimes and all trends eventually break down.
Why “The Trend is your Friend” Strategy Doesn’t Suck?
All trades taken in the direction of the prevailing trend have a higher chance to be successful. If a confirmed trend is in place, a bounce from the trend line combined with a tool like Japanese candlesticks, Divergence, Fibonacci or any other reliable indicator is for me a trade that cannot be missed. There is no sure trade in Binary Options, Forex, Stocks or any other market and all we can do is make sure we tilt the balance of probability in our favor.
The Conclusion – Trend is indeed your Friend!
The examples above are meant to illustrate the power of the trend and this is more than just a strategy; I would call it a way of looking at trading and making sure that we are always riding the trend. Then, the exact entry is somewhat secondary because we can take an entry signal from any reliable tool and we are not limited to the tools presented here by me. I merely tried to exemplify the saying “The trend is your friend” and show you what exactly that means. Once you stop trading against the trend and just go with the flow of the market I am confident that your track record will greatly improve.