Tackling Trending Markets

The trend is always the trader's friend, until it bends. However, even traders who are caught on the wrong side when the trend finally breaks are usually able to show some profits from the long run of the trending market.

There is still much debate about how best to access a trending market. Should a trader buy in and ride it to the top, or should he or she buy at the lower bound and sell at the upper bound? What about taking two different positions, one long and one short as the security hits the respective lower and upper boundary of the trending market?

The long established rule for how long trending markets exist is 30-40% of the total trading time. That is, on average, a stock, index, or other security will trend for a couple of hours each day, about a week out of every month, or a few months out of the year. Obviously, this amount of time is not consecutive, and some trending markets may last for ten touches to a trendline, while others last for only a few.

Riding the Trending Market

The majority of traders, and thus the majority of speculative interest, argues that riding the trending market wave is not only easier than swimming against the current, but also more profitable and accurate. Since the goal of every trader is consistency in everything from earnings to growth, as well as in the number of available trades, riding a trending market to its full potential is a very attractive idea.

On the other side, however, are the contrarians, who rather than following the current trend, would rather bet on its breakdown or reversal. This goal and trading strategy is less conventional, as it relies on more profitable, but less accurate trading, and less consistency. Plus, unlike following a common trending market, contrarians have to deal with knowing they are in the minority.

Imagine what it might have felt like to people who were net short dot com stocks during the internet boom and subsequent bust? Or people who were selling stocks at their highs in 2007 before the market fell off a cliff at the turn of the year? If they were early to make a contrarian play, they had to hold on as the market moved against them, maybe even for months. Obviously, contrarian positions require much more firmness in your resolve to hold onto your trades.

Balancing Time and Trending Markets

For long term trading and swing trading, following the trending market and swimming with, not against, the tide is perhaps a better strategy than playing contrarian. Over the long haul, a number of factors go into determining the value of stocks and securities, including economic conditions, currency movements, the availability of credit and other “big picture” effects.

In the short term, where trades may last only a few minutes, contrarians are not exposed to nearly as many variables. Instead, contrarians are exposed only to the minute intra-day action between traders, much of which is hardly centered on macroeconomic realities or other long term issues. Plus, since short term investors can exit the market when fundamental data like employment or consumer confidence emerges, short term contrarians can effectively minimize the importance of long-term trends to near zero.

Regardless of which side of the fence a trader ultimately chooses, the most important part to maintaining profitability is consistency in a trading strategy. If your strategy calls for market longs only in a positive trending market, then go long. If your strategy says stay market long until the first touch of the upper bound, then short after a touch, then go long and then finally short. There are profitable traders that trade with a trending market and against a trending market, however, there are few that do both and even fewer or who so inconsistently.
Tim Ord
Ord Oracle


Day Trading Simulator


Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.