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What Makes Trend?
What is trend?
That is a deceptively complex question. As someone who almost exclusively traded counter-trend moves for the past ten years, I found the idea of defining and identifying trend to be a real challenge. Counter-trend trading is relatively easy because it’s organic. It’s a reactive strategy that is derived from the trend itself. Until trend materializes there is nothing to do and nothing to define. Once trend takes place, the counter-trend setups kick into gear.
Trend on the other hand, requires predictive rather reactive skills and therein lies the rub.
At its most basic trend is simply a continuation of price. But what causes that continuation? Certainly, news is a major catalyst. An unexpected piece of data or a casual remark by a central bank official can have price ramifications for hours and sometimes days. But news is not the only catalyst for trend. Sometimes it’s just price. A price move will take on a momentum of its own and will create trend without any new information in the market. So sometimes news creates price and sometimes price creates news.
That’s what makes trend so tricky to trade.
Counter-trend trading (which is effectively market making) is an actuarial activity. It’s based on the law of large numbers -- very much like the insurance model. Trend, on the other hand, requires the eye of a fine jeweler. Ideally, the trader needs all three components to come together -- price action, news action and sentiment. Trend is rare -- it occurs no more than 30% of the time in the market. And that is perhaps the most difficult thing about trading trend well. For a day trader like me, it’s truly a Herculean effort to maintain the patience to trade trend properly.
Still, the more I do it, the more I appreciate it. Trend, in reality, is very different from what the books and gurus tell you -- but nevertheless, it can be a very profitable strategy once you figure out how it works.