Catching the Trend

[TopstepTrader 10]

Catching the Trend

 

Gregg Killpack of Topsteptrader.com

 

Yes, we have all heard the saying, “the trend is your friend”, and for good reason: that’s where the money is. The easiest way to make money is by catching the trend in the time frame you are trading and ride it as far as you can. However, that’s easier said than done.

 

If you think about it, the earlier you catch the trend, the more money you’re going to make and the less risk you will take. Novice traders usually haven’t developed the skill of seeing the trend until it is well-developed – and by that time, it is more likely to reverse soon. Ever felt like the market kept reversing on you soon after you entered a position? That may be what’s going on – you’re noticing the trend too late.

 

At the other end of the spectrum are traders who are constantly trying to catch reversals too early, which is a very difficult thing to do. They jump in on the opposite direction of the trend thinking a reversal is coming without evidence on the charts to back them up. Their experience is something like jumping in front of a train repeatedly and hoping it stops in time. My experience is – most of the time it doesn’t and I get run over.

 

The worst thing about it is that on occasion these trades are successful and make a lot of money because they catch the market just as it changes direction. However, in the long-term this is not going to be a winning strategy. There are just too many losers and too infrequent, albeit large winners.

 

The correct way to catch a new trend is to notice when a trend that has been going on for a while is losing steam – that’s momentum. After a trend is losing energy, it shows in two ways: time and price. Most of the time a trend doesn’t sharply change directions and then run in the opposite direction (unless there’s some big news item). Instead it usually stops moving in the direction of the trend and stays there for a little while going sideways. In an uptrend, it is as if

the sellers are looking at the buyers and wondering, Are you done buying? After a while, if the buyers don’t continue buying the sellers will assume the buyers are done and will take the market lower. (Buyers and sellers are constantly sizing each other up to see how strong the other is.)

 

In terms of price, an excellent way to determine a high is to see a candle with lower highs on the two bars before and after the high. That’s an excellent low-risk place to go short, because if it hits a new high you place your stop there, but there is a lot of room to go down for a big move vs. the risk you take. This is taught in detail by the most excellent book by Larry Williams, Long-Term Secrets to Short-Term Trading. A low, of course, is the opposite – a candle with higher lows two bars before and two bars after that candle.

 

If you can see when the trend is reversing, it will help you be more profitable by entering and exiting your trades in better spots.

 

Many Profitable Returns,

 

Trader Gregg