In my humble opinion, trading trends on smaller time frames
is a recipe for disaster. I have lost a lot of money trying to day trade trends.
Trend following strategies will only work when market trends the whole day
without any consolidations. That is only on
type 1 trend days. But this rarely
happens.
Market moves in short term ranges. For me a trend is
successive higher or lower ranges. This change in perspective totally changed
the way I traded the Markets. I have written about this concept
here,
here and
here.
I will try to explain this concept a little more. Do not
expect the price action to be picture perfect. Hunting for the patterns may not
work. But I feel the concept will be very helpful in your trading, especially
if you are day trading.
Look at the picture. It is the day’s price action. Market
trended from A to F and reversed. Now let us see how a trend trader might have
traded it. Market was ranging between A and B. He enters on the breakout of B.
Price goes up to D and consolidates between C and D. This trader brings his
stop below C. A Complex pullback or a Breakout failure stops him out and market
moves up. He again enters at D on breakout and gets stopped out at E. After
this he will most probably miss the reversal entry at G.
As range traders we are trying to do it differently. We try
to sell the range highs and buys range lows. In the above example we are trying
to enter on the BOF of point A and ride it till point D where price move
exhausts. We exit at D and allow the market to consolidate. Then we look for a
with trend entry at C. Another BOF at C may take price to F where we again
exit. Once price breaks below G we go short.
Trend/Breakout traders most probably end up capturing B to C
and D to E, where as we attempt to capture A to D and C to F. If it work well we will end up capturing more than the whole trend, that is A to F. Further we try to
fade the range extremes for small gains. Most of the time we will be able to
catch the move down
Our success as a trader will depend on our ability to transform
such ideas and concepts into actionable trading tactics and of course on our ability to efficiently execute such tactics. Unfortunately
creativity and imagination is in short supply.
Hope I could convey the concept well. If you have any doubts
feel free to ask.
