When it comes to trading, one common piece of advice from instructors is to trade in the direction of the trend on the daily chart. This means buying when the trend is up and selling when the trend is down. Even when identifying trading opportunities using chart patterns, it is crucial to consider the direction of the trend as a directional bias. In this article, we will explore the significance of trading with the trend and how it can enhance your trading strategy.
Identifying Trading Opportunities
Let’s take a look at the daily chart of EUR/USD to illustrate the concept. In this chart, we can see an instance of Double Tops and a Range Bound situation. This pattern is often viewed as solid trading opportunities by many traders. They attempt to sell Double Tops and buy Double Bottoms, waiting for a breakout of the range to enter a trade in the direction of the breakout.
However, it is important to note that relying solely on these patterns without considering the trend can be risky. When a market pulls back from an all-time high and starts moving back up to new all-time highs, it may appear as a potential double top. But selling all-time highs or buying all-time lows is not a reliable approach for consistent profits. Instead, it is advisable to buy a market that is at or near all-time highs, rather than trying to predict the end of a trending move. Selling Double Tops in a downtrend and buying Double Bottoms in an uptrend should be the preferred strategy.
Trading with Double Tops and Double Bottoms
To better understand this approach, let’s examine two examples on the chart. When the market moves down through the support low between the two highs, it serves as confirmation of a Double Top. Many traders will sell at this point and place a protective stop above the Double Top. This represents a solid trading opportunity within the context of the downtrend.
The Direction of Breakouts
Considering the trend is also crucial when a market enters a range-bound situation. Often, this occurs when traders are awaiting a news event before taking new positions. In such cases, the news event typically confirms the direction of the trend and breaks out of the range in the same direction. Therefore, markets that are moving down and then enter a range are more likely to break down through support. Conversely, markets that are moving up and then enter a range are more likely to break out above resistance.
It’s important to note that these tendencies are not foolproof, as there are exceptions. However, they do provide traders with a professional edge that can form the basis of a solid trading approach.
Trading with the trend is a fundamental principle that every trader should consider. It provides a directional bias that can significantly enhance your trading strategy. Even when identifying trading opportunities using chart patterns, it is essential to evaluate the trend’s direction and align your trades accordingly.
In the case of Double Tops and Double Bottoms, it is advisable to sell Double Tops in a downtrend and buy Double Bottoms in an uptrend. This approach ensures that you are trading in the direction of the prevailing trend, increasing the likelihood of successful trades.
Additionally, when a market enters a range-bound situation, the trend often determines the direction of the subsequent breakout. Markets that are moving down and enter a range are more likely to break down through support, while markets moving up and entering a range are more likely to break out above resistance.
While there are exceptions to these tendencies, incorporating the trend into your trading decisions provides a professional edge. By aligning your trades with the trend, you increase the probability of profitable outcomes and develop a more robust trading strategy. So remember, always trade with the trend!