Daytrading. The illusion of a TREND

A

alex.samant

I will share with you something other traders have talked about and if you read Crabel's, Wyckoff's, Taylor's books you kinda get this feeling.

If you daytrade (but even if you are a long term trader) there is no point in establishing a market trend and then trying to reveal it with the aid of moving averages, trendlines, MACD or any other trend following indicator.

The reason is simple:

A so called trend is said to have 3 phases, the first is the beginning phase, when the trend breaks out of a consolidation period, then the next is the body of the trend, a clean period of higher highs and higher lows in theory and then the last phase of the trend, the consolidation phase from which it could reverse or continue.

Now, if you are a rational type of guy and you like to think of yourself as an objective dude, you would actually see that:

a) the first phase, when the trend initiates is non tradeable as it usually takes place at the end of the previous trend.

b) the body of the trend is actually the only one tradeable and everyone sees it. however, when everyone sees it, there are dangers around the corner.

c) the end of the trend or the consolidation phase will only whipsaw you as you still consider that you are in a trend.

So, as far as probabilities go, there is a 35-40% clean probability of the daily price action going the so called trend's way.

Now, why on earth would you stick with your trend when 60% of the time you would get whipsawed?

The SOLUTION to this is:

Learn to "see" the market in 2, 3 day patterns, look for gaps, major reversal patterns, continuation etc.

For example:

A pattern that has a high probability and is actually found in the so called trend's body, or second phase is the
higher high, higher low pattern.

This implies that you have day 1, after which day 2 makes a higher high and a higher low, and then comes day 3, that has a higher directional probability to the upside.

However, even this pattern can be a trick as the daily open and the placement of stop orders can turn the whole thing around. But still, on average it has more than 60% proability, wherever it is found, regardless of any trend.

Other patterns also exists, like inside days, reversal gaps, etc, but each type of pattern has it's own rules and money management.

When you get accustomed with more patterns you can trade more often and more efficient.

Cheers yo!
 
"a) the first phase, when the trend initiates is non tradeable as it usually takes place at the end of the previous trend."

Learn to look for these breakouts after consolidations and trend reversals and you will pretty much have answered your own questions/comments.

Good post.

Jimmy Jam
 
thanks JJ, as i said, there are other setups that involve breakouts from inside days, gaps up, down, irrespective of what phase one might percieve the trend to be in.

one other major role besides the open in daytrading has been rightfully attributed to the placement of stops above/below the last day's/several days high/low.
 
a) the first phase, when the trend initiates is non tradeable as it usually takes place at the end of the previous trend.

Why do you think that what you describe as start of the trend is indeed the start of the trend for someone else? What is not tradeable for you might be very well tradeable for someone else. Your are projecting your own (limited) abilities on others whithout even knowing how skilled (or unskilled) they are. You impose your conclusions on others without any valid proof. These kind of statements shpuld only be made by God (or Mohammed). The fact that you make such a statement proves also that you are not open for a potential new and revealing world. You probably deny that there might be spectacular and fascinating things, things that you don’t know or understand, but that are understood by others.


b) the body of the trend is actually the only one tradeable and everyone sees it. however, when everyone sees it, there are dangers around the corner.

Of course the body is tradeable. Of course there are ALWAYS dangers around the corner. Not only in trendfollowing but also in what works for you apparently: patterns.
Danger is not an exclusivity for trendfollowers and surely not an argument to conclude that trendfollowing doesn’t work. Danger is inherent to trading, no matter what system you use.


c) the end of the trend or the consolidation phase will only whipsaw you as you still consider that you are in a trend.
Again assumptions you make without any valid proof that these assumptions are valid for EVERYONE.


Quote from alex.samant:

I will share with you something other traders have talked about and if you read Crabel's, Wyckoff's, Taylor's books you kinda get this feeling.

If you daytrade (but even if you are a long term trader) there is no point in establishing a market trend and then trying to reveal it with the aid of moving averages, trendlines, MACD or any other trend following indicator.

The reason is simple:

A so called trend is said to have 3 phases, the first is the beginning phase, when the trend breaks out of a consolidation period, then the next is the body of the trend, a clean period of higher highs and higher lows in theory and then the last phase of the trend, the consolidation phase from which it could reverse or continue.

Now, if you are a rational type of guy and you like to think of yourself as an objective dude, you would actually see that:

a) the first phase, when the trend initiates is non tradeable as it usually takes place at the end of the previous trend.

b) the body of the trend is actually the only one tradeable and everyone sees it. however, when everyone sees it, there are dangers around the corner.

c) the end of the trend or the consolidation phase will only whipsaw you as you still consider that you are in a trend.

So, as far as probabilities go, there is a 35-40% clean probability of the daily price action going the so called trend's way.

Now, why on earth would you stick with your trend when 60% of the time you would get whipsawed?

The SOLUTION to this is:

Learn to "see" the market in 2, 3 day patterns, look for gaps, major reversal patterns, continuation etc.

For example:

A pattern that has a high probability and is actually found in the so called trend's body, or second phase is the
higher high, higher low pattern.

This implies that you have day 1, after which day 2 makes a higher high and a higher low, and then comes day 3, that has a higher directional probability to the upside.

However, even this pattern can be a trick as the daily open and the placement of stop orders can turn the whole thing around. But still, on average it has more than 60% proability, wherever it is found, regardless of any trend.

Other patterns also exists, like inside days, reversal gaps, etc, but each type of pattern has it's own rules and money management.

When you get accustomed with more patterns you can trade more often and more efficient.

Cheers yo!
More...
 
i appreciate the feedback spike.

indeed, i might have been a little intolerant.

i used to trade with the trend and found it very hard to stick to it in phases A and C.

I do understand (might be just a little or might be more) what it means to follow a trend.
 
It seems strange to me that you should dismiss trends within the daily activity so quickly.

I've traded the same style on eurofx, hsi, nikkei, spi, stw and eur.jpy and in each case I can identify a probable trend long enough to profit from it (when wrong I take a smaller loss).

The same advantages apply:
- the push with the trend is longer than the countertrend (more money at projectable targets)
- trades with the trend are more forgiving because if you don't exit at the perfect point in the thrust the retracement probably won't go as far back as you stop (but do count thrusts to assess risk).

I frequently see 2-3 trends in a day - a single trend all day is a rare beast.
 
Quote from kiwi_trader:

The same advantages apply:
- the push with the trend is longer than the countertrend (more money at projectable targets)
- trades with the trend are more forgiving because if you don't exit at the perfect point in the thrust the retracement probably won't go as far back as you stop (but do count thrusts to assess risk).

I frequently see 2-3 trends in a day - a single trend all day is a rare beast.
More...

Exactly. These advantages are favouring the risk/reward ratio.

Example: you have to swim from point A to point B, and the waterflow is also from A to B.
If you swim you will reach your target easily because the waterflow will give you an additional push in the right direction. If you get tired, all you have to do is float, the waterflow will bring you to your destination. The risk that you will be taken in the opposite direction is minimal because the waterflow will have to reverse.

If the flow is from B to A, you will have to make huge efforts to reach the target because the waterflow is an additional resistance to overcome. If you get tired, floating will get you away from your initail target. And if you are really tired you will drawn. The risks taken are huge, the efforts to make are huge, the rewards are small.

But there will always be people who prefer to make their live difficult instead of seeking it the easy way. You have to trade what feels right, no matter what system it is; but trendfollowing can let you do that in better circumstances, circumstances that cannot be controlled by you but are imposed by the market.
 
Quote from alex.samant:

...Now, if you are a rational type of guy and you like to think of yourself as an objective dude, you would actually see that:

a) the first phase, when the trend initiates is non tradeable as it usually takes place at the end of the previous trend.

b) the body of the trend is actually the only one tradeable and everyone sees it. however, when everyone sees it, there are dangers around the corner.

c) the end of the trend or the consolidation phase will only whipsaw you as you still consider that you are in a trend...
More...

What's tradable and profitable is strategy dependent.

For example, I'm sure you and I use a different method for trading if we were to sit down and compare notes.

A and C in your above examples is the easiest to trade and most profitable phases.

In contrast, phase B is the most difficult to trade if there's not an understanding of trend continuation.

Simply, the reason why I disagree with your statements is because we use a different trading plan.

Therefore, I'm not saying your trading plan is inaccurate for the above phases.

I'm saying you should not assume that phase A, B and C are applicable to someone else using a completely different method than yours.

Thus, you are correct via your method and incorrect via someone using a different method.

Mark
 
everyone i appreciate your posts as this is intended to be a debate from which everyone can draw conclusions.

however, i need to explain the guidelines of my methods in order for one to understand what i am talking about. no detail, just brief, rough lines:

i trade intraday using S/R levels and trendlines.

I get my bias from the daily chart.

I was referring to using 2,3,4 say 5 day patterns on the daily chart rather than establishing a trend on the daily chart and taking positions in that direction irrespective of the pattern that is revealed on the same chart.
 
I do know quite well that everyone has his own method, and if I come to think about it.... this is not even a debate. If it was, we should all have had the same methods.

How ignorant was I...

Sheesh
 
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