One of the core principles in trading is "follow the trend, trend is your friend." This classic advice is commonly heard in the forex world. However, while it seems simple, following the trend isn't always easy to do, especially for beginner traders. I’ve often struggled to apply this principle, even after receiving this advice during my first week of learning forex.
Common Mistakes in Following the Trend
Even though the phrase "follow the trend" sounds straightforward, many traders find it challenging to implement. A frequent mistake I’ve made is taking positions that go against the current trend, often driven by overconfidence or the urge to test my analysis. This typically leads to unpleasant floating negative results.
Case Example: EUR/USD Pair
Let’s consider the EUR/USD pair over the past few weeks. On the 15-minute time frame, there was a prolonged sideways movement, followed by a significant price surge. During the sideways phase, it signaled a tug-of-war between buyers and sellers. When one side finally gains control, a breakout often occurs, leading to a sharp price move.
In the case of EUR/USD, after the price surge, there was a brief pause, leading me to think the price was overbought and a retracement was due. I then placed a pending sell limit order, hoping the price would drop. However, what actually happened was the price continued to rise, leaving me with a floating negative position.
Mistakes in Decision-Making
Another significant mistake was not placing a pending buy stop order when the price kept rising. I assumed the price had reached its peak and worried the buy stop would be triggered at the top. However, after reviewing the chart on the daily time frame, I realized that the price was still at the beginning of a larger uptrend, indicating my initial judgment was wrong.
Lessons Learned
From this experience, I learned that fighting the trend is not an effective strategy. In trading, it's better to follow the ongoing trend than to challenge it. Following the trend allows us to leverage market momentum and avoid unnecessary losses. Here are some key takeaways:
- Discipline in Following the Trend: Trends represent the dominant forces in the market, and by following them, we can position ourselves more safely.
- Avoid Overconfidence: Overconfidence in personal analysis can lead to decisions that contradict the market reality. Trusting the visible trend on the chart is a more prudent approach.
- Use Larger Time Frames: Observing the trend on daily or weekly time frames provides a clearer picture and helps avoid false signals on smaller time frames.
Why Following the Trend is Safer
As retail traders with smaller capital compared to major market players, we don’t have the power to move the market. Therefore, following the trend is the best way to capitalize on momentum and minimize losses. Trends indicate where the market's strength is headed, and by following them, we can reduce the risk of floating negatives that come from going against the flow.
Following the trend in trading is an effective strategy because it allows traders to capitalize on market momentum and avoid unnecessary losses. Although not always easy, maintaining discipline in following trends, avoiding overconfidence, and always watching the larger time frame trends will improve your chances of trading success. Remember, "the trend is your friend" is not just advice—it’s a fundamental principle that every trader should hold onto.
