Trend Following: Buying Into Strength, Selling Into Weakness

I haven't being posting as much due to my lack of actual time in order to prepare something worthy of sharing with fellow traders/followers.

Today, I came across something really worthy of sharing.

Recently, I realized that many traders/aspiring traders lack the kind of reasoning about the game of trading. I am pretty much convinced that trading is truly about the game of probabilities rather than an art. Of course there is a lot of geometry in trading. Of course there are occasions in which a trend line or a particular technical formation will work (or fail) as expected. But even in those cases, one has to play the game of cards only when the odds are clearly in his/her favor. Trading is not that much different from playing a card game such as poker. As a matter of fact, trading has even more information available than a ramdom hand at a poker game.

I observe fellow traders/aspiring traders drawing perfectly fitting trend lines as a mean to give them some sort of certainty about the market and its future fluctuations. In a sense, it's pretty understandable that the human being seeks some sort of certainty or protection: a trend line, for many, is considered as a barrier or a place price has/will respect. Guess what: there will be times (many by the way) at which the trend line will not live to one's expectations. Period.

Instead of basing my trades solely on trend lines or formations (TA in general), I prefer to use these tools as complimentary ones. "Filters" as you may.

In future posts will be showing examples of where/when lines or technical formations can help a lot in the decision process for a particular trade. I will also be showing a few examples on how it's perfectly possible to make above average probability trading decisions.

For now, I would like to share with a you a 7th grade physics experiment/exercise that could elucidate a lot of things.

Lets imagine a sail boat. The sail boat departed from point A in direction to point B. Currently, the sail boat is 65% closer to point B and only 35% close to original point A. If you may, the boat is 65% further from point A and 35% closer to point B. The wind is blowing at 50 km/h in the direction of point B. The captain of the boat has to make a decision right now because it's mid day and he has to make to either shore before dawn.

Q: If you were the captain, would you try to head towards point A or let the boat sail towards point B?

The answer will seem quite obvious to most people. However, this is the kind of thinking that most traders lack: think of this in probabilities. It seem way more probable that the boat would reach point B before it could possibly reach point A.

Now lets try to translate this into trading.

Try to think of points A and B as being the bottom/top of a particular range. For example: A could be the low of a week and B the high of a week. Or A could be the high of a month and B the low of a month.

Try to imagine the wind as being the trend. The trend will be up if, for example, on a H1 chart, price is clearly making HHs and HLs. The trend will be down if price is clearly making LL and HLs. It shouldn't be too difficult to identify on H1/H4 charts if price is trending up or down. A third instance may happen as when price is neither clearly trending up or down. In this case, we could consider the conditions at sea as being WINDLESS!


The speed of the wind or the 'speed' of the trend can be measured by the angle of its slope. The more vertical angle there is in a trend, the more "wind" there is for the boat to sail and/or for price to move.

Now lets go back to the original problem and try to rephrase it into trading terms:

Lets imagine the price of a particular asset. Price departed from point A in the direction of point B. It is clearly making HHs and HLs for the last 9-10 days. Therefore it's clearly in an uptrend. It is a rather vertically inclined slope as observed in the H1 chart. Currently, price is 35% closer to the top (POINT B) of this trend/range and 65% far way from the bottom of this range/trend (POINT A).

Q: If you are a trader, would you rather open a LONG position 'betting' that point B will be surpassed first or would open a SHORT position "betting"that point A will be taken out first?


This is where the corollary: "Buy into strength, sell into weakness" comes into play. Opening positions in the direction of the trend and where price has the most chances of expanding has significant probabilistic advantages over opening trades against the trend and where price has less probabilities of expanding towards.

Trading is not an exact science, therefore a trader will have unprofitable trades at times. However, in the long run, I can guarantee you that you will have a higher odd of being successful at this game if you are able to identify and actually execute only the above average probability trades.

On the contrary, trying to pick tops or bottoms with disregard to probabilities is virtual suicide. Even with the best money management, if one bases his/her trading on potential top/bottom setups, he/she will be doomed to failure.

Knowing where, when and how much thru probability evaluation, is key.

Come to think about it, many of the things we have to deal in our daily lives is directly related to probability.

I recommend that the fellow trader/aspiring trader try to play around with the elements of this particular exercise such as the distance, wind speed, etc as to try to evaluate what he/she considers as being acceptable for picking trades. Just try to visualize that the more elements you have in your favor, the higher the probabilities.

I also drastically recommend that fellow traders/aspiring ones give some more attention to thinking in probabilities than to drawing some perfectly fit lines.

As promised, I will be posting examples of trades taken using the above experiment/exercise and a few using lines as filter or support to a trade decision making process.

The best thing a trader can do for his/her trading is to start thinking in probabilities.