GreatnessFx
New Member
By its very definition, a trend is something that has already happened. It is only recognized after the fact.
Now, what causes the most confusion is deciding on a trade direction once the trend direction is determined. We have all heard the age-old trading phrase, The trend is your friend and others like Dont fight the trend, Dont try to catch a falling knife etc.
Well, to start with, Ed Seykota, the legendary trader made a little addition to the phrase the trend is your friend. He said, The trend is your friend, UNTIL THE BEND AT THE END.
To add to Ed Seykotas point, another legendary and extremely wealthy trader, Paul Tudor Jones said the following about trends in general, I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.
Allow me to use the Newtons fundamental laws of motion to explain trends and what happens to them. These laws are easily found on Google. I just picked the first link on a google search
Newtons first law of motion:
Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.
Newtons first law of motion adapted to Trends:
Every Trend in a state of uniform motion tends to remain in that state of motion until an external force (An opposing larger timeframe zone) is applied to it.
The reason a lot of traders say trade in the direction of the trend is because trends do obey this first law a trend will continue in its current direction hence the view that the trend is a friend.
A trend will continue in its current direction UNTIL the bend at the end comes when this trend reaches an opposing LARGER timeframe zone, for example, a downtrend on a weekly chart reaching a monthly demand zone; or a daily uptrend reaching a weekly supply zone.
So it is for this reason that it is critical that we know where THE BIGGER TIME FRAME LEVELS ARE before we go ahead to follow any trend and not just follow the trend blindly.
Newtons second law of motion:
The relationship between an object's mass m, its acceleration a, and the applied force F is F = ma
Newtons second law of motion adapted to Trends:
The force needed to stop and change a trend must be larger than the force available on the timeframe the trend is identified on. That force by definition can only come from a higher timeframe
To stop an uptrend, you need a mass of sellers and for there to be no more buyers (a loss of buying momentum).
We can only find enough of a mass of sellers on a timeframe higher than the one we are looking at the trend on
We assess momentum or acceleration using trend lines.
We do not assess Trend using trend lines
The combination of finding enough of a mass of sellers (arriving at the larger time frame supply zone), the lack of more buyers and the loss of momentum shown by a trend line break tells us that the trend is no longer up and may soon become down.
Newtons third law of motion:
For every action there is an equal and opposite reaction.
Newtons third law of motion adapted to trends: This is how sideways markets are born
For every wave of buying that there is an equal and opposite wave of selling for, we will have no overall movement, resulting in a sideways market
Now, what causes the most confusion is deciding on a trade direction once the trend direction is determined. We have all heard the age-old trading phrase, The trend is your friend and others like Dont fight the trend, Dont try to catch a falling knife etc.
Well, to start with, Ed Seykota, the legendary trader made a little addition to the phrase the trend is your friend. He said, The trend is your friend, UNTIL THE BEND AT THE END.
To add to Ed Seykotas point, another legendary and extremely wealthy trader, Paul Tudor Jones said the following about trends in general, I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.
Allow me to use the Newtons fundamental laws of motion to explain trends and what happens to them. These laws are easily found on Google. I just picked the first link on a google search
Newtons first law of motion:
Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.
Newtons first law of motion adapted to Trends:
Every Trend in a state of uniform motion tends to remain in that state of motion until an external force (An opposing larger timeframe zone) is applied to it.
The reason a lot of traders say trade in the direction of the trend is because trends do obey this first law a trend will continue in its current direction hence the view that the trend is a friend.
A trend will continue in its current direction UNTIL the bend at the end comes when this trend reaches an opposing LARGER timeframe zone, for example, a downtrend on a weekly chart reaching a monthly demand zone; or a daily uptrend reaching a weekly supply zone.
So it is for this reason that it is critical that we know where THE BIGGER TIME FRAME LEVELS ARE before we go ahead to follow any trend and not just follow the trend blindly.
Newtons second law of motion:
The relationship between an object's mass m, its acceleration a, and the applied force F is F = ma
Newtons second law of motion adapted to Trends:
The force needed to stop and change a trend must be larger than the force available on the timeframe the trend is identified on. That force by definition can only come from a higher timeframe
To stop an uptrend, you need a mass of sellers and for there to be no more buyers (a loss of buying momentum).
We can only find enough of a mass of sellers on a timeframe higher than the one we are looking at the trend on
We assess momentum or acceleration using trend lines.
We do not assess Trend using trend lines
The combination of finding enough of a mass of sellers (arriving at the larger time frame supply zone), the lack of more buyers and the loss of momentum shown by a trend line break tells us that the trend is no longer up and may soon become down.
Newtons third law of motion:
For every action there is an equal and opposite reaction.
Newtons third law of motion adapted to trends: This is how sideways markets are born
For every wave of buying that there is an equal and opposite wave of selling for, we will have no overall movement, resulting in a sideways market
