1) The trend is your friend until it isn’t
Trends are integral to trading; they are the lifeblood of the price action within financial markets and can be the key that opens the door to trading success.
Yet despite that, it's surprising just how many of us don't seem to understand the importance of price trends, and, how to use them to our advantage rather than our detriment.
What do we mean when we talk about trends?
In the context of the markets, we are talking about repetition in the price action, under which the price of an instrument moves continuously, in the same direction, be that upward or downward, over a period of time.
An uptrend, in which price moves higher, is simply a series of higher highs and higher lows in the price of an instrument.
A downtrend, in which price moves lower, is simply a series of lower highs and lower lows.
In the chart below we can see a good example of an uptrend in chip maker Nvidia between the 8th of January and the 16th of February. After a brief pause, the uptrend re-asserted itself on the 22nd of Feb running through until the 8th of March.
Source: Barchart.com
Identifying and running with a trend is a popular trading strategy and can be used in conjunction with trailing stop losses, to help protect any profits you make, as you follow the trend.
You will have a running profit, once the current price, is above your entry price.
And, once you can move your stop loss, above your entry price, you are in a strong position on the trade.
What you shouldn’t do is to try and predict the end of a trend.
Because frankly trying to pick tops or bottoms can be a thankless task.
It’s far better to let the market tell you when the trend is changing or ending.
In the case of Nvidia, the uptrend has largely remained intact since the price moved above the 10-day MA line in early January.
Even the bearish engulfing pattern posted on Friday the 8th of March didn’t end the up trend, but it did put us on notice that this was possible.
2) It’s better to be profitable than right
It can be fascinating trying to work out why a market or instrument is moving in a particular way and we can build all sorts of models and theories to explain the price action and the changes in it.
The reality is however that there are some many variables and participants within the modern electronic markets that trying to make sense of it all is far too big a task for an individual trader it's even beyond the scope of groups of traders and the research departments at some of the world biggest banks and brokers.
It's all too easy to get obsessed with why something is happening.
When in fact it's far more efficient to stop worrying about why and instead learn to focus on the fact that it is happening. Even if your intuition tells you it shouldn't be.
The celebrated economist and trader John Maynard Keynes famously said:
“The market can remain irrational longer than you can remain solvent”
Those were wise words and ones that we should take heed of.
Success in trading is measured by longevity in the game and the growth of your trading capital.
Winning brownie points for working out why something happened won't pay the bills in the same way that capturing a price move will.
3) Be pragmatic not dogmatic about the markets
That brings us nicely to rule number three:
It's all very well having a trading plan, indeed it’s essential to have a set of rules that we follow, each time we trade.
However, we also need to acknowledge the sentiments expressed by German Field Marshal, Moltke The Elder, who famously quipped:
“No plan of operations extends with certainty, beyond the first encounter with the enemy's main strength.”
Which these days tends to be shortened to:
“ No plan survives contact with the enemy”
What Marshal Moltke was saying is, that war is a chaotic environment - that even the best-laid plans can’t cope with.
Whilst trading is not a life-and-death environment, like the battlefield. It is still a contest, between you, your fellow traders and the market.
A contest that takes place in a dynamic environment, that's constantly evolving.
That means, that we have to be adaptable too, if, we are not only to survive but to thrive, in that environment.
That doesn't mean that we can throw our trading rules out of the window.
But it does mean that we can't just rigidly stick to them regardless.
We need to be pragmatic and adapt them, to suit the prevailing market conditions.
To help to get into the pragmatic mindset stop worrying about why?
And instead, start focusing on what is and what if.
I often talk about the power of “what if thinking” - a little imagination helps me a great deal when it comes to identifying trade opportunities and set-ups. And what could come next in the price action with the introduction of a suitable catalyst?
I often won’t know what form that catalyst will take, however, that doesn't matter as long as I can identify the path of least resistance in the price action when it emerges.
Using this type of methodology I create watchlists and lists of alerts/charts of interest etc. I leave notes to remind me what interested me in the first instance about the instrument, ss and when an alert is triggered, for example, as here in Boeing.
In part of this piece, we will look at two more trading rules that I consider to be essential for navigating modern markets.
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