Trading Mistakes to Avoid – Fighting the Trend

Stocks, and markets, can either be trending, volatile, choppy or flat. Volatility is what makes traders salivate, if they can take advantage and be on the right side of the extreme moves, both up and down. Choppy days, when the price action remains in a small, tight range, can wreak havoc on an account, by triggering false signals and leading to overtrading (see chapter XX). Flat price action don’t lend itself to trading at all. Each of these conditions presents its own challenges, but trending days stand out because they demand a great deal of patience to trade.

When a stock is trending, there’s usually a reason for it. the way to trade a trend is to take a position and hold it as long as the trend lets you. As the saying goes, “the trend is your friend.” The last thing you want to do is to trade against it, unless you have a very compelling reason to do so. Many traders will look for a trend to stall, hoping to catch a reversal to the mean, or more.

Cautious traders will wait for confirmation of a trend reversal, be it a candlestick formation, a break of a moving average or a bounce off of a support or resistance level before taking a position. Aggressive traders will try to anticipate a reversal by taking a position before a move has occurred. If done at the right time and place on the chart, an experienced trader can appropriately manage their risk and place their stop close to the area they believe will act as support or resistance. Many newer traders who try to anticipate moves end up entering their trades without taking into account appropriate stop loss area and end up getting hurt.

In either case, trying to catch a trend reversal without confirmation can end in multiple failures and significantly chip away at your account, even with good risk management. Trends eventually reverse, but how long it might take to do so is an unknown. Trying to anticipate the reversal is like trying to step in front of a moving train, again and again. If the trend is strong, it will run you over every time.

Fighting the trend not only drains your account but also takes a mental toll. It’s frustrating to enter a short position only to watch the stock climb higher—or to buy into a potential bottom only to see it keep falling.

Bottom Line

Catching reversals is a wonderful trading strategy and can be extremely profitable. The problem is when you try to anticipate reversals in a strong trend and repeatedly fail. Even with the best risk management, continues losses will still take their toll and might even discourage from continuing to trade and cause you to miss the reversal when it eventually does come. The safest way to trade against a trend is to wait for confirmation of the break. In most cases, there will still be plenty of room in the reversal to profit from, even if you miss the initial trend break. On the bright side, you’ll avoid lots of painful losses and frustration.