Trading with the Trend versus Trading against the Trend
Student's Comment:Can you show on a chart the advantages of trading with the trend as opposed to trading retracements? Thanks.
Instructor's Response:While pips can be made trading counter trend, they will come with a greater amount of risk. The question often arises why there is greater risk trading against the trend. Essentially, when taking trades in the direction of the trend, the trader has the momentum, the “push” of the market behind them. When trading countertrend there is less momentum favoring that direction and trend can kick back in at any time negating the profits which may have been gained trading against the trend. Bottom line: the countertrend movements are much less “predictable” than are the trending movements. Counter trend entries need to be much more precise whereas entries with the trend can be more forgiving.Let's take a little more in depth look at this historical AUDUSD Weekly chart with an eye toward trading trends vs trading retracements...
We can see that beginning with the first bullish uptrend, three major upside moves (those noted in green) have taken place. During that same time frame, six retracements (those noted in red) have occurred. Just at a glance we can see the moves with the direction of the trend are much smoother and of a longer duration. The moves against the trend, on the other hand, are much shorter and not at all smooth.The total pips gained going with the trend during this time are approximately 2870 while those gained going against the trend are roughly 2025...a difference of 845 pips. As mentioned above, no one ever said pips cannot be made in counter trend trading, just that they come with more risk associated with them.So, the question before the trader is would they rather be in fewer trades that are of a longer duration and have smoother movement cycles with greater pip potential, or take the risks that are presented by taking a greater number of trades that are of shorter duration with ragged movement cycles and less pip potential?
If you have a live trading account with FXCM, you can learn more about Trend Trading in our Trading Course. To access the course, with your live account Trading Station open, click on the Research button at the top of the Trading Station. Next click on Trading Course and then locate the topic of Trend Trading under the Course Subjects heading.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.