Forex Mistake #7 – Little Trends are Not Your Friends!

Why Trading with the Trend Strategy could get you Broke?

Trading with the trend is one of the most used trading strategies and very profitable I’d say. However, there are many traders losing money while trying to apply this strategy. Back in the times when I was going to school, I remember being asked by my geography teacher which river is longer: Amazon or Mississippi. I answered Mississippi. Shattered, he looked at me and asked how much longer Mississippi is than Amazon. I said: by five letters (:. All my classmates were laughing but my teacher wasn’t. This is how I got an “F” that day. I guess, this is the same thing that happens with traders “making fun of the trend”. If you don’t know, “F” is from “fail” and this is what you gonna get from the market if you don’t learn your lesson well.

 

How you can go Broke with Trading Little Trends?

I can’t say that trading the trend is my favorite strategy but I know that this one works better than many others and the most important thing is that it works. So I guess that now, the question is, if it does, why are many traders losing money when applying this strategy? After all, the trend can only go up or down and so do you. It’s very simple…isn’t it? According to Investopedia, the “Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor.” So if moving with the trends will lead to profit for an investor then this can’t be the reason why traders are losing money. What then?

 

Looking around, I found Tymen1 –honorary member of Babypips.com forum. I appreciate his initiative of trying to help the newbies by sharing from his experience but I do not agree with his “theory”. Actually not even him, is agree with his own theory. But he discovered this later…  According to his 10th post, he is calling the green and the pink lines “little trends”. That’s hilarious. I am sure that there are many traders looking at the “trends” in the same way as he does. So this is why applying the “follow the trend” strategy makes many traders go broke. The strategy itself is one of the best trading strategies but you have to know how to establish a trend first and then to apply it. According to Charles Dow – the founder of the Wall Street Journal and cofounder of the Dow Jones & Company, – the market has three movements: the “main movement” or major trend, the “secondary reaction” or intermediate trend and the “short swing” or minor trend. The three movements can be simultaneous, for instance, a daily minor movement in a bearish secondary reaction, in a bullish primary movement. If according to Charles Dow, the “minor trend” can last from hours to a month, what is the “little trends’” duration then? From a few seconds to a few minutes (:? I agree that Charles Dow created that theory for the stock market and that the Forex is a little different but looking on the 20 minutes chart and trading “little trends” does not seem an appropriate way to trade the trend. I am sure there are many scalpers and intra-day traders reading these lines and saying that I suck but guess what: first, I discovered that trading the “little trends” does not work in the summer time – at least this is what a newbie ( RMSTrader), on the same forum is saying: “…It really depends on market condition. Right now, for instance (summer in USA) is a very bad time to use this method…” If you want to have fun and read more on the best season to use “little trends” just read what RMSTrader has to say. Second, seems like “little trends” made Tymen1 go broke. Strange…isn’t it? Otherwise, I do not understand why he quit his strategy. TalonD – another honorary member of Babypips.com – is saying, “I have kept in touch with Tymen and I see Grav online sometimes too. Tymen doesn’t use this method anymore. He has been using Renko charts lately.”

 

 

Conclusion – Whatever you See on Less than 4H Chart is NOT a Trend!

In my humble opinion, whatever you see on less than 4h chart is not a trend. If the “minor trend” can last hours, the 4h chart is the minimum time frame that you can look at to identify the “short swing.” Maybe the “Dow Theory” was created for the stock market but believe me that it works perfectly in the Forex as long as you know very well what the theory says and apply it on the appropriate time frames. The only difference is that in the Forex Market things happen a little faster than it does in the stock market so what lasts years there, could be only months in Forex. Here are a few tips for you for how to apply the Dow Theory in the Forex trading:

 

  • Look at the weekly chart to identify the “main movement,” at the daily chart to see if there is any “secondary reaction” and at 4h chart for the “short swings”.
  • If you are a scalper, it’s useless to look for the trend. Applying this strategy will only bring more losses than wins.
  • Once you identified the three movements, trade accordingly. This means that if you want to speculate the secondary reaction – being a bearish trend for example – look for the support and resistance on the same time frame and place your stop loss and take profit orders near those levels even if this means to have wide stop losses.
  • Once you learned the “Dow Theory,” do not take in consideration any other method to trade the trend even if this comes from “honorary members” of any website/forum.
  • If you think that you are not able to identify the trends as described by Charles Dow, the trend is not your friend then, but your enemy. You better look for other strategies to apply.
  • When a trend is broken, most of the times the rate action comes back to retest the broken trend line. If you missed the opportunity to switch your trade, this is your occasion to enter the new trend.

 

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