Rule #1 – Trade the Trend
“The trend is your friend” may be the most widely used truism in investing…and it’s directly applicable to the study of Cycles. Trading with the trend comes in at #1 on my Top 10 rules list because I believe it is one of the most important rules to follow. All too often I speak with traders obsessed with a biased view of the market. When that market is moving against their belief, they’re fixated on trying to pick a bottom or top (at any cost) in a severely trending market.
The reality is that picking turns correctly is nearly impossible to do, at least not consistently. The biggest sin is that repeated attempts at catching the turn leaves the trader missing the primary trending opportunity, which in a bull or bear market extreme is often some serious gains. Lastly, who could forget that the process of catching reversals in a trending market leaves the trader with a portfolio having suffered a “death by a thousand paper cuts”.
With Cycles, we attempt to identify significant Lows that mark the start of a new trend or the end of a counter to the main trend pivot that affords us the opportunity to get back into a trade with the direction of the primary trend. In Cycles, we trade with the trend, the simple but powerful concept of a “rising tide floats all boats”. Trading the primary trend often elevates our positions and corrects any poorly timed entries and exits.
The advantage of trading with the trend is that it is the direction traded by the big money – the whales, hedge & asset funds and the collective retail crowd. The momentum this causes allows price to continue moving in the direction of the trend until there is a good reason for it to end, such as a blow-off top in a bull market or a massive capitulation sell-off in a bear market.
The point is that it’s extremely difficult to make money trading against a powerful trend. On the flip side, it’s much easier to make money when structuring your trades that are positioned to profit in the direction of the trend. Just like a sailor needs to understand how the currents are flowing and in which direction the winds are blowing, so too must a trader or investor know what the market’s primary trend is before formulating his/her own trade ideas.
All too often it is one’s personal bias that is the foundation for a trade, and that will inherently become a situation where the trader is fighting the tape or trend. A stubborn trader who thinks they are wiser or bigger than the collective market is somebody who ends up holding on to losers for far too long or who personalizes the markets to the point where you end up #REKT. The humble trader, who acknowledges they do not know more, will leave their bias behind and will happily trade with the trend.
In summary, you need to first appreciate what your personal time-frame and horizon is for trading and investing. Once you know what time-frame you’re working on, you can discover the general direction and trend of that market simply by identifying if that asset is making a series of higher highs or lows, on that timeframe. Once you identify that trend, make it a rule to rarely trade against it. IF you trade against the trend, play it tight and defensive. Being a so-called contrarian might sound cool, but the reality is they are wrong most of the time. We’re not in this game to be right, but to be profitable. The next time you place a trade, remember to ask yourself, "am I being biased here or am I trading with the trend?"
Simple Example of a Bull and Bear trend in Bitcoin. Trading with these two trends would almost automatically have ensured a profitable outcome.
- Trading the primary trend often elevates our positions and corrects any poorly timed entries and exits.
- Trying to repeatedly capture a bounce or turn can lead to "death by a thousand paper cuts"
- Identify the trend by spotting higher lows and higher highs. (or lower highs and lower lows)
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