Of the many market sayings that traders throw around, none may be more overused and less understood than the adage "The trend is your friend" As a trader, you have probably heard the old adage that it is best to trade with the trend. The trend, say all the pundits, is your friend. This is sage advice as long as you know and can accept that the trend can end. And then the trend is not your friend.
There are tons of different indicators that you can put on your charts to help you identify a trending market and trade with it. Many traders spend countless hours and dollars on trend-following trading systems or on indicators that just end up confusing them and making the process of trend discovery a lot more difficult than it needs to be. A trend is not actually a strategy by itself; it’s just an added point of confluence that increases the probability of a trade. However, just randomly jumping in with a trending market is not an edge or a strategy.
When people see lots of other people doing something they feel like they need to do the same, in trading this concept translates to the trend. The longer the trend, the more and more people who are all doing the same thing i.e buying or selling, people who are not in the trend will look at this and think they should also begin buying or selling as that is what everyone is doing, therefore it must be the right thing to do. So trading in the direction of the trend offers people safety, they feel safe because their doing trading in the same direction as everyone else.
When the retail traders lose money by closing their trades it will cause the market to move in the direction of which the reversal is taking place, how far the market moves is entirely dependent on how many traders had trades open in the direction of the trend before the reversal took place. The market movement generated by the traders closing losing trades will eventually reach a point where all the traders who lost when the market reversed identify the movement as a new trend. This is usually the time when the market will stop trending and either consolidate or retrace.
The“ trend is your friend” is only true if you properly understand where you’re at in the life of a trend. If you can get into a trend right at the beginning (which is going be difficult as no technical signals would have appeared yet ) then the trend will be the greatest friend you’ve ever had, you’ll make so much money it that is likely you would stop trading altogether. If you get into a trend when it near the end of its lifespan you’ll still be able to make a bit of money, but you must keep your expectations low, don’t fool yourself into thinking the market’s been going up for ages surely its going to keep moving up.