Let me explain…
Trading against the trend
Trading against the trend is, I'll say, quite illogical, and that you don't want to do this.
You've heard the saying, 'a trend is your friend until it bends.'
So, let's see why trading with the trend puts you in a much more favorable position:
Because think about this...
You notice that there is a downtrend right here, and you see a series of lower highs (Red arrow).
So, when you are trading the trend this means that you are preferably looking to get short.
And if you are looking to get short...
You can see that a move towards the downside is much more sustained!
Look at these downside movements here:
They are pretty much stronger and lasts longer!
Whereas compared to someone wants to trade against the trend, where they're looking to get long.
Look at the bull traders who are going long in this market.
Look at the up moves that resulted from trading against the trend:
So, these are the up moves, very sharp, very limited.
You can see that the strength by the Bulls is very weak compared to the Bears.
If you are looking to trade against the trend, then you can see that there is really not much so-called 'meat' in the move.
Your gains are pretty much limited because you're trading against the trend!
Likewise, if you want to trade breakouts, I would strongly discourage or strongly advise you not to trade against the trend.
Because, for example, you see over here there is an area of resistance:
And let's say you're looking to trade the breakout higher...
I would say chances are this breakout isn't really going to go very far!
Because, after all, you're trading against the trend.
What is likely to happen is that even if it does a breakout, It would trade higher before it collapses lower, giving you a false breakout over here:
So, beware of trading against the trend whether you're trading breakouts, pull back or whatever entry techniques you will use.
This usually isn't really the best ideal situation to be trading.
Far from structure
What does it mean?
Look at this example:
This chart is the GBP/AUD 4-hour time frame.
But bear in mind, whatever market you're looking at, whatever time frame, the principles are essentially the same.
Whether it's a 4-hour, a daily, the weekly, the hourly, they are the same.
Just apply and learn the principles and don't really care too much what markets or time frame this is.
But nonetheless, this market, we have a very nice uptrend.
At this point in time, you see the price has traded at this point, it is so high.
And traders look at this chart and they say, “Oh wow! Rayner, look how bullish this is! I better get long before price trades higher without me!"
So, you got long at the high over here:
But what’s the problem with going long at this high based on the example.
Think about this...
The thing is, where are you going to put your stop loss?
Or should I say, where is the logical place for you to put your stop loss?
Well, you're not going to put anywhere here:
Because there is no structure to lean against.
The nearest structure that comes is this high over here:
Previous resistance with a possibility of becoming support.
This level is the one that you need to lean against to place your stop loss.
And of course, you don't want to be putting exactly at this level as well because the price could just come into this level and bounce higher.
Chances are, you need to put your stop loss somewhere below here:
A rough estimate.
The size of your stop loss is very large!
You compare back to the magnitude of the move previously.
The size of this stop loss is very big compared to this recent move.
When you have a very large stop loss, what happens?
You're going to get a poor risk to reward, right?
Because the price has to move an equal distance in your favor before you attain a 1:1 risk to reward.
As you can see, having a large stop loss gives you a poor risk to reward.
Usually, most of the time or I would say 99% of the time...
I don't really want to deal with guarantees, because there are certain times in the market where traders can be successful doing this kind of trading approach.
But I would discourage you to trade breakouts when it's far away from the structure.
Because of the fact that you need to have a very large stop loss.
And it gives you a very poor risk to reward as a result of it.
How do you identify high probability trading breakouts like a pro
These are the three things to bear in mind: