In our latest video on trading biases we're going to look at just why it is
people can't trade with the trend and what we can do to try and fix that. Hello
I'm David Jones from Capital.com and this is one in a series of videos
where we're looking at common trading bad habits or trading biases. Within our
trading platform at Capital.com we have an algorithm that tries to detect
certain biases within traders. Maybe ways that are going wrong bad habits they
developed and try to push them in the right direction. A really common trading
bias is trading against the trend. We all know when we first start trading one of
the things we hear is "the trend is your friend ", but it's something that so many
of us have problems in doing, in trading with an existing trend in a market. So
let's take a look at just why we have these problems and, secondly, what steps
we can take to try and force ourselves to go with the main trend in a market.
Let's explore this bias that people have for trading against the trend. Markets
trend - this is a fact. So markets will trend, up in a bull market,
down in a bear market or sideways where they're just trading in a range. The
reality is most traders will trade against the trend. They see a market
that's going up, they'll try and pick a top, they see a market that's falling,
they'll try and pick a bottom. I think it's part of human nature.
So most traders will end up the wrong side of a trend and of course that would
result in them losing money. So what we need to do is have a simple approach for
identifying the trend to try and help us trade with that trend. There's a couple
of easy ways of doing this. Probably the most straightforward is trend lines,
we'll take a little look at this in a second on a real chart, so identifying a
rising trend or a falling trend by using trend lines. A more mathematical way of
doing it is using moving averages and again we'll look at a couple of examples
of this on real markets. So here's our chart, this is pound-US dollar,
clearly just by eyeballing this chart - we're looking at the
lows from here March 2017 through to January 2018 - we can eyeball
this on a daily chart and see the broad trend of the market is up. Let's draw a
trend line on this, we'll access the drawing tools from here... scroll down and
pick trend. In an uptrend the trend line sits underneath the lows... there we go. So
the assumption is any weakness back to the trend we're expecting this trend line
to hold the market up. Let's just walk forwards and see what happens. So we can
see the market does move higher, from here, sells off, comes back to the
trendline and moves higher again. So trading with the trend would have been
the least painful approach here. We're putting market momentum on our side.
Let's take a look at a downtrend. So again we're sticking with pound-US
dollar. Clearly in this period we're looking at here the market had been
falling; the trend was down. So let's draw our trend line. So in a downtrend the
trend line sits above the highs. So the assumption
is any strength from this market back towards 133 would expect the sellers to
come back in. Let's just walk forwards, we can see the market rallies but then
continues the move lower. So here we would have profited from trading in the
direction of the trend. Obviously it's not going to work all the time but using
trend lines is a really simple way to reinforce to us what the timeframe of
the trend is, for the time frame that we're looking at. So to try and make us
trade in the direction of the trend and not go against that trend. Let's take a
look at moving averages. So we're back on pound-US dollar. Let's add a moving
average for this chart. I go to indicators, moving averages are in most
popular and the trend section. Let's go to moving average as usual you can
choose the period you want that fits in with your trading approach. Let's say
we're going to go for a 50-day moving average. Here we go pound-US dollar. So it
broke above the 50-day moving average in November 2017 and continued to rise. So
while the market is above the moving average the
assumption is the market is in an uptrend. So again what you want to be
doing is looking to buy in. We had some choppiness here, and this is the drawback
of moving averages, if we have a market that starts to go sideways it will chop
around the moving average, but then a sell signal here in April 2018, where the
price fell below the moving average. So again the assumption is while its below
the moving average it's in a downtrend. So this is another simple way of
trying to identify and highlight trends in the market that you're following. So
whether you use a moving average, or a trend line, put something on the chart
that just reminds you which way the trend is going and forces you maybe a
bit more to trade in that direction. We have plenty of other videos on trading
biases and other information such as: market outlooks, trading strategies, this
sort of thing. But for this particular section on trading against the trend,
from me, David Jones, and Capital.com we'll wrap it up there.