What Does “The Trend is Your Friend” Mean in Trading?

Cobra Trading, Inc.
May 23, 2022

When you see a trend, it can be very tempting to bet against it and assume that the stock price will eventually bounce back to its previous value. And while this strategy has some merit in certain situations, generally speaking, you should see the trend as your friend. In most cases, that means following the trend, as opposed to betting against it.

Why should you stop fighting the trend and simply wait for the best entry? There are several reasons.

If you are a short seller, and the stock price goes up, you may feel enticed to short it while it continues to increase in price. At first, it seems like a sound strategy because the stock can only break out so much. However, nobody can predict exactly how high it’s going to go before it dips. So if you enter your position too early and the trend continues, you may end up with a significant loss.

The same goes for long buyers. If the stock dips down and you’re sure that it’s about to bounce back up, there’s no need to rush and buy the ongoing dip. There’s no way to say when the dip is actually going to turn, so sometimes, it’s better to wait for a turn to make sure that the price is actually going up. 

Waiting does mean that you won’t hit the lowest low or the highest high. Whenever you are trading stocks with a lot of range, you don’t really need to hit these peaks and valleys to make money. You can get in later and still achieve results.

Some traders may recognize the highest high and the lowest low, make money on a single trade, and post PnL charts on social media. And if you are waiting for the trend to turn, you may feel like you are missing out on a huge opportunity. However, most people don’t have the discipline to see their plan through and tap out of the trade if their guess is wrong. This is why it could be beneficial for traders to wait for a lower high if selling short, and a higher low if going long. It might give you a smaller range to work with, but it’s also a lower risk that creates a vastly more comfortable trading environment.

Becoming a profitable trader is all about consistency. Posting small profits over time will enhance your discipline and encourage you to follow your plan, apply risk management, and get better at your tailored methods.

Besides, the long-term consequences of experiencing high stress due to increased risk aren’t always worth it. You might have heard the phrase “death by paper cuts.” It’s a perfect metaphor for what happens when day traders get impatient and try to bet against a trade way too early. They end up taking multiple small losses as the trade hits their risk, and they have no choice but to exit at a loss. And if the trader decides to be stubborn, starts revenge trading, and sticks with the decision no matter what, this can lead to a devastating outcome.

This is why it is generally so much safer to wait for the backside. But it’s important to remember that even waiting for a trend to turn does not always guarantee you will be correct. The stock market is volatile, and by waiting, you are simply reducing the excessive risk of going against a trend. While some risk still exists, you are just minimizing one aspect of it.

So, just because Cobra Trading can sometimes provide borrows with no upfront fees (often referred to as free locates), and our experts can help you locate the trending stocks, it doesn’t mean that you need to jump into a trade head first. Instead, evaluate each transaction thoroughly and wait for a substantial signal.

If you’re looking for more information, check out our Resources page with educational posts and our YouTube channel for videos about day trading.

Call Us Today: 877-792-6272