Trading Bias: trading against the trend

Trading Bias: trading against the trend


In our latest video on trading biases
we’re going to look at just why it is people can’t trade with the trend and
what we can do to try and fix that. Hello I’m David Jones from Capital.com and
this is one in a series of videos where we’re looking at common trading
bad habits or trading biases. Within our trading platform at Capital.com we have
an algorithm that tries to detect certain biases within traders. Maybe ways
that are going wrong bad habits they developed and try to push them in the
right direction. A really common trading bias is trading against the trend. We all
know when we first start trading one of the things we hear is “the trend is your
friend “, but it’s something that so many of us have problems in doing, in trading
with an existing trend in a market. So let’s take a look at just why we have
these problems and, secondly, what steps we can take to try and force ourselves
to go with the main trend in a market. Let’s explore this bias that people have
for trading against the trend. Markets trend – this is a fact.
So markets will trend, up in a bull market, down in a bear market or sideways where
they’re just trading in a range. The reality is most traders will trade
against the trend. They see a market that’s going up, they’ll try and pick a
top, they see a market that’s falling, they’ll try and pick a bottom. I think
it’s part of human nature. So most traders will end up the wrong
side of a trend and of course that would result in them losing money. So what we
need to do is have a simple approach for identifying the trend to try and help us
trade with that trend. There’s a couple of easy ways of doing this. Probably the
most straightforward is trend lines, we’ll take a little look at this in a
second on a real chart, so identifying a rising trend or a falling trend by using
trend lines. A more mathematical way of doing it is using moving averages and
again we’ll look at a couple of examples of this on real markets. So here’s our
chart, this is pound-US dollar, clearly just by eyeballing this
chart – we’re looking at the lows from here March 2017 through to January 2018 – we can eyeball this on a daily chart and see the broad
trend of the market is up. Let’s draw a trend line on this, we’ll access the
drawing tools from here… scroll down and pick trend. In an uptrend the trend line
sits underneath the lows… there we go. So the assumption is any weakness back to
the trend we’re expecting this trend line to hold the market up. Let’s just walk
forwards and see what happens. So we can see the market does move higher, from
here, sells off, comes back to the trendline and moves higher again. So
trading with the trend would have been the least painful approach here. We’re
putting market momentum on our side. Let’s take a look at a downtrend.
So again we’re sticking with pound-US dollar. Clearly in this period we’re
looking at here the market had been falling; the trend was down. So let’s draw
our trend line. So in a downtrend the trend line sits above the highs. So the assumption is any strength from this market back
towards 133 would expect the sellers to come back in. Let’s just walk forwards, we
can see the market rallies but then continues the move lower. So here we
would have profited from trading in the direction of the trend. Obviously it’s
not going to work all the time but using trend lines is a really simple way to
reinforce to us what the timeframe of the trend is, for the time frame that
we’re looking at. So to try and make us trade in the direction of the trend and
not go against that trend. Let’s take a look at moving averages. So we’re back on pound-US dollar. Let’s add a moving average for this chart. I go to
indicators, moving averages are in most popular and the trend section. Let’s go
to moving average as usual you can choose the period you want that fits in
with your trading approach. Let’s say we’re going to go for a 50-day moving
average. Here we go pound-US dollar. So it broke above the 50-day moving average in
November 2017 and continued to rise. So while the market is above the moving average the assumption is the market is in an
uptrend. So again what you want to be doing is looking to buy in. We had some
choppiness here, and this is the drawback of moving averages, if we have a market
that starts to go sideways it will chop around the moving average, but then a
sell signal here in April 2018, where the price fell below the moving average. So
again the assumption is while its below the moving average it’s in a downtrend.
So this is another simple way of trying to identify and highlight trends
in the market that you’re following. So whether you use a moving average, or a
trend line, put something on the chart that just reminds you which way the
trend is going and forces you maybe a bit more to trade in that direction. We
have plenty of other videos on trading biases and other information such as:
market outlooks, trading strategies, this sort of thing. But for this particular
section on trading against the trend, from me, David Jones, and Capital.com
we’ll wrap it up there.

2 Comments

  • subhransu sekhar sahu

    January 26, 2019

    Sir you are no more uploading videoes like before

    Reply
  • Capital.com

    March 21, 2019

    Create a trading account with zero comissions, no transaction fees and the tightest spreads -> https://capitalcom.onelink.me/700515151/youtube

    Reply

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