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In today’s episode, you’ll discover when you should not trade with the trend.
So tune in right now…
Resources
The 5 Best Trend Indicators That Work
The Complete Guide to Trend Line Trading
Trend Following Trading Strategy Guide
The Moving Average Trading Strategy Guide
Transcript
Hey, hey, what’s up my friends? In today’s episode, I want to share with you when should you not trade with the trend.
Now you may be thinking, “But Rayner you always tell us to trade with the trend man, what’s going on?” Yes, I am a strong advocate of trend trading or trading with the trend. But there are scenarios where it’s not favourable to be trading with the trend.
There are times when it’s much better to just remain on the sidelines. Here are three scenarios where I would advocate not trading with the trend but instead remain on the sidelines. If you’re an advanced trader, you can even take a counter-trend trade instead.
1. When the price is overextended from a respected moving average
For example, let’s say the market is in an uptrend with a series of higher highs, higher lows. And you notice that this market tends to respect the 50-period moving average and has retested the moving average the past three times. So it respects this 50-period moving average.
Now, when the price is very far away from the moving average and has a strong run-up that’s quite a distance away from the 50-period moving average, you can imagine that there’s this huge empty space on your chart.
When you notice this huge empty space, this is a signal to you that you don’t want to be trading with the trend. Why? Because this is when this market is prone to making a pullback possibly back towards the respected moving average like the 50-period moving average.
If you were to trade with the trend at that time, you’ll likely get stopped out on the pullback. So if you noticed a market on an uptrend respecting a moving average but is overextended from the moving average, don’t trade with the trend – stay on the sidelines instead
2. When the price is far away from a price structure
Let’s say the market is in a range and it made a huge bullish breakout. The market is in an uptrend and it seems like it’s time to buy – well, not quite. Because if you analyse the chart it’s a huge bullish breakout of resistance. If you buy now where do you set your stop loss?
You’ll probably have to set your stop loss at a logical price structure below the previous resistance which could now act as support. But the problem is that the price has moved too fast, too soon.
If you chase the breakout just to trade with the trend, then your stop loss will be very far away. What traders usually do is to set a fixed stop loss of like $10 or $20. But what happens if the breakout fails?
It becomes a false breakout and you will get stopped out when the market makes a normal pullback because your stop loss is at a poor level to start with. Again, if you notice the market has broken out aggressively and you think it’s time to buy, just hold onto your horses first
Because you don’t want to get stopped out on a pullback or reversal. That’s number two – when the price is far away from a price structure in the case when the price broke out of resistance far from your entry price, just let the trade go. Don’t chase the breakout.
3. When the price is at the upper boundaries of a trend channel
In an uptrend, sometimes you might be able to draw trend channels or parallel trend lines, one at the upper bounds of the trend and one at the lower bounds of the trend that the market respects.
Now, if the price is near the upper boundaries of an uptrend channel, you don’t want to be buying at the upper boundary. Why? Because if it’s contained within the channel, there’s a good chance that it could come back down towards the lower part of the channel.
And when that happens, you will again, get stopped out. In essence, what I’m trying to share with you here is that yes, the market could be trending, but it doesn’t mean that you want to blindly buy anywhere.
4. When the price is far from an area of value
If it’s far away from an area of value, a price structure, or a logical level for you to set your stop loss, then you don’t want to be chasing the trend, because there’s no logical place to set your stop loss. That’s one.
Number two, when the pullback comes, you will likely get stopped out because you had randomly put a stop loss on your trade. Make sense?
What I’m getting at is that, don’t trade far away from an area of value even though the market is trending. This leads to the point where if you want to trade with the trend, then trade it from an area of value like the 50-period moving average, if that’s a healthy trend.
Or if the market is trending higher and comes back to retest support, you can look to buy near that area of support. Or if it’s respecting a certain trend line and it has bounced off the trend line three or four times, when it retests for the fifth time and there is a bullish price rejection, you can look to trade from that area of value.
Don’t chase the market, don’t buy when the trend is overextended. Because again, when a pullback comes, you will likely get stopped out.
Let’s do a quick recap.
Recap
- Don’t trade with the trend when it’s far away from a respected moving average
- Don’t trade with the trend when the market is far away from a price structure
- Don’t trade with the trend when you realize that the trend is near the upper trend channel in an uptrend
- Trade from an area of value not far from it
With that said, I wish you good luck and good trading. I will talk to you soon.