Trading With the Trends

Trading With the Trends

Submitted by adil on Fri, 03/06/2015 - 08:46

As a trader, almost everyone would have heard the saying that the best practice is to trade with the trend. This is a good advice as long as you know that one trend can end or change. So it is important to know how you can determine the direction of trend. While trading with the trend, it is also important to keep in mind the time frames of the trends.

Trading with the trend

Trading with the trend can be very effective. It can increase the number of signals for successful trading if you open your trades to bullish and bearish positions. This does not mean that both positions should be traded on at the same time, but it simply means that whenever a bullish or bearish signal opens up, you should be able to trade in it.

Primary Trend

A primary trend is an extensive period in a market cycle in which prices make lower lows and higher highs i.e. bearish and bullish market. It reaches a peak and then sets up a trend in the opposite direction. This trend refers to a period of two years or more. It consists of a series of secondary market trends.

Primary trend is a long term trend and is very important because it impacts the secondary and minor trends in the market. It also affects the movements in stock prices. Primary trend is either bullish or bearish.

Primary upward trend (Bull market): A bull market is a rising market. The investors are positive and take risks because they believe that stock prices will increase with time. They buy calls and sell puts.

Primary downward trend (Bear market): A bear market is a declining one. The investors do not take risks because they believe that there will be sharp decline in stock prices. They sell calls and buy puts.

The effect of primary trends remains as long as the reversal does not occur. This is also one of the most troublesome factors about primary trends – it becomes difficult to determine how long the price movement will continue before the reversal occurs.

Secondary Trend

A secondary trend is a short period in market cycle which moves in the opposite direction of the primary trend. This trend refers to different but short term market movements, from time period of an hour to a month. When secondary trend finishes, the primary trend is re-established. An important trait of this trend is that its movements are more volatile than those of primary trend.

Traders are normally advised to follow the trends to achieve successful trades, and it creates a lot of ease for binary traders. For example, if the trend is moving upward, you can easily trade calls and in case of downward trend, puts. Similarly, in case the signal is strong, you can use short expiry and longer expiry in case of week signals.

Trading against the trend

It is not compulsory to always trade with the trend, rather if you adopt the right approach, trading against the trend can be helpful as well, for example in the cases where the signals are uncertain. There are two conditions in which a trader might consider going against the trend. One condition is that if you have suspected a reversal – so that if a reversal is going to occur, you will take position when price goes the other way. The other condition is when you have a solid trend – in this situation you can keep an eye on the continuously strengthening trend and take advantage by moving against the grain.

But a common question would be why anyone wants to trade against the trend when trading with the trend is much more reliable and easier? Only if the trader is extra careful and an expert in the field!