Trading against the trend an easy way to lose money on IQ Option
Consider this scenario, you're trading the EUR/USD currency pair. For several hours the trend was gradually going up then ranging. Then an interest rate increase in the US is announced. The result is a sudden drop in prices.
The price continue to drop like a lead stone in water. But considering the earlier bullish trend, you place a buy order. It loses, you still place a buy order resulting in a second loss. You continue doing so until your account is depleted.
Then the price goes up again. Trend followers always say – follow the trend. You never know when the trend will reverse. So why try to go against what the market says?
|→Trading against the trend can lead to significant losses in the market.|
|→Identifying and following the trend can result in more successful trades.|
|→Develop strategies and techniques to recognize trends and trade with them, rather than against them.|
When should you religiously follow the trend?
Consider the Iqoption EUR/USD chart below. The prices had been rising steadily from 13 June at 13.00. The uptrend continued for 24 hours before a sudden break resulted in a sharp drop in prices.
Now the sharp drop occurred over a 2 hour period before they started to stabilize (bearish candles were shorter). For most traders, this could be a signal for the trend reversing and they would have likely placed buy trades.
But the prices continued dropping creating a new resistance. If you notice prices falling sharply and breaking previous support and resistance levels, it's very likely that they will continue falling. At this point, it's recommended that you go with the trend and place a sell order. Trading against the trend is very likely to result in losing trades
Eventually the trend will reverse and the prices will form new resistance and support levels. At this point, prices tend to hit a certain price point before bouncing back. These are strong resistance and support levels. If the price breaks either, it's time to trade with the trend again.
What does it mean to trade against the market?
The market is rising, falling or in a sideways trend. There are generally only these three possibilities. To say that one is trading against the market is therefore the same as trading against the trend. In sideways movements when the market remains between support and resistance, one may be tempted to open a sell position at the resistance, even though the price is going up at the same time. Conversely, you can buy at support despite the fact that the price is going down. In this case, however, it is not trading against the trend or the market. It is merely taking advantage of the fact that the price is moving in a price channel bounded by the resistance line above and the support line below.
How do you avoid trading against the trend?
Now look at the IQ Option EUR/USD chart below. You'll notice that the prices tend to fall to a certain level (support) before bouncing back. There are small trends forming but they're unlikely to be of much use if you're not trading short time frames.
At this point, it's best to sit at the sidelines and let the bulls and bears fight it out. But once this support is broken (a large bearish candle), you know for sure that a downtrend has developed. It's time to place your sell trade.
Trading with the trend is hard when prices are ranging.
Pros and Cons of Trading with the Trend
- Higher probability of success when trading with the trend.
- Easier to identify entry and exit points.
- Less stress and emotional turmoil during trading.
- Potential for missed opportunities in range-bound markets.
- Difficulty in identifying trend reversals, which may lead to losses.
- Requires patience and discipline to wait for the right trading signals.
|Trend Trading Techniques||Description|
|Moving Averages||A technical indicator that smooths out price data to identify trends over time.|
|Trend Lines||Lines drawn on a price chart to connect swing highs and lows, helping to identify the direction of the trend.|
|Support and Resistance Levels||Price levels where buying and selling pressure typically occur, offering potential entry and exit points in a trending market.|
|Price Channels||Parallel trend lines that help traders to identify a range-bound market and possible breakout points.|
How do you trade in a trend?
There are many techniques to trade with the trend. The most important thing is to be able to identify it. You may be asking yourself how to identify trend in day trading? Trend trading for beginners generally uses moving averages to assess the current trend. Some also determine the trend using trend lines. However, these can be too subjective for beginners to make trading decisions based on them. The easiest way to determine the trend is through observation. Visually it is easy to see if the market is moving directionally. If not, wait and join the trend when you can see the market's directional intentions. The trend is your friend. Remember about that. If you notice a trend forming, trade along with it. Never trade against a trend because you never know when it's going to reverse or range.
Only the markets will give you the signal. Are you a trend follower? What strategies do you use to identify a trend besides the prices breaking support and resistance levels? Share them in the comments section.
Q&A: Trading with the Trend
- Q: How do I identify a trend in the market?
- A: Use technical indicators like moving averages, trend lines, and support/resistance levels to identify the direction of the market. Observation and experience will also help to recognize trends.
- Q: What should I do if I'm unsure about the direction of the trend?
- A: Be patient and wait for clear trend signals before entering a trade. Avoid taking trades based on guesswork or emotions.
- Q: Can I trade both with and against the trend?
- A: While it's possible, trading against the trend is riskier and can result in higher losses. It's generally advised to trade with the trend for more consistent results.
- Q: How can I manage risk when trading with the trend?
- A: Use stop-loss orders, proper position sizing, and diversification to manage risk when trading. Additionally, follow a disciplined trading plan and avoid emotional decision-making.
- Q: What are some common mistakes traders make when trying to trade with the trend?
- A: Common mistakes include entering trades too early or late, failing to use stop-loss orders, and not having a clear trading plan.
GENERAL RISK WARNING
Kindly note that this article does not provide any investment advice. The information presented regarding past events or potential future developments is solely an opinion and cannot be guaranteed as factual, including the provided examples. We caution readers accordingly.
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