Brandon Wendell, CMT
Brandon Wendell
In a recent Extended Learning Track (XLT) - Stock class, we were trading the open of the markets and I had an interesting question arise several times. "When trading, is it better to trade with the market and longer term trend, or can you ignore it and trade just the short-term?"
What you have to realize is that there are two environments in any trend. The first is the impulse and the second is the correction. The impulses are the movements of the shorter time frames that move in the direction of the larger time frame trends. Corrections are pullbacks that move counter to the trend and allow the buyers or sellers to regain strength to continue the trend.
Impulses tend to be powerful, move faster and cover more price than the corresponding corrections. Therefore, if you are looking for a way to make faster, larger profits, you should trade the impulses. A trader can make counter-trend trades on the corrections. However, they must realize that they are accepting greater risk as the profit targets will be smaller and the potential for loss is great if they do not exit their trade before the new impulse begins. As always, greater risk = greater rewards. A trader willing to accept the risks of counter-trend trading in addition to trend trading stands to profit more than the one who only trades the impulse.
As a beginning trader, I recommend you stay with the trend trading. The moves are easier to see and predict and the losses will come at a slower, milder pace. Trading in the direction of the larger term trend and the broad markets will accomplish this.
If you do choose to trade counter-trend, then there are several things you must consider: Your skill level, the broader market direction and the supply/demand picture of your stock. Counter-trend trading should only be done by traders who have honed their platform and technical analysis skills. Remember, you are trading a correction which will most likely move very fast against you if you miss the proper exit point. This requires you to be able to interpret the difference between a pullback and a reversal in trend as well as having the knowledge of your platform and ability to execute orders quickly.
When you trade counter-trend, you must also be mindful of the broad market's direction and potential turning points. Just as we saw the bullish market pulling weak stocks upward in the above chart, they will reverse corrections rapidly. Be prepared to exit a counter-trend trade if the market hits supply or demand even if your stock doesn't. The power of the markets over individual stocks is immense.
Also, be realistic in your targets for the counter-trend trade. Impulses are powerful and are more likely to break supply or demand levels on your chart only to stall and correct at the supply and demand of larger time frames. Most corrections in contrast, will reverse at areas of supply and demand on the time frame you are viewing. Do not be too greedy as you choose your profit targets for the trade. Like they say, "Bulls profit. Bears profit. But hogs get slaughtered."
So as a newer trader, it is just easier and safer to identify the trend of your stock and trade in the direction of that dominant trend. As you become more skilled and experienced, counter-trend may offer some additional profit opportunities, but are not right for everyone. Trade safe and trade well!
Have a great day.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD softens to near 1.3600 as BoE hints further rate cuts
The GBP/USD pair loses ground to near 1.3610 during the early Asian session on Monday. The Pound Sterling softens against the Greenback amid growing expectations of the Bank of England’s interest-rate cut. Traders will take more cues from the Fedspeak later on Monday.
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Editors’ Picks
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Gold holds gains near $5,000 as China's gold buying drives demand
Gold price clings to the latest uptick near $5,000 in Asian trading on Monday. The precious metal holds its recovery amid a weaker US Dollar and rising demand from the Chinese central bank. The delayed release of the US employment report for January will be in the spotlight later this week.
AUD/USD: Buyers eyes 0.7050 amid upbeat mood
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Bitcoin Weekly Forecast: The worst may be behind us
Bitcoin price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle
Tariffs are not only inflationary for a nation but also risk undermining the trust and credibility that go hand in hand with the responsibility of being the leading nation in the free world and controlling the world’s reserve currency.
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