In trading, you often hear about how “the trend is your friend” and “don’t fight the trend.” The fundamental premise behind these maxims is that big money (aka institutional investors) ultimately push stocks up and down, opposed to the small retail trader that trades in 100 or 1,000 share lots.
And as a retail trader, it’s important to objectively realize the unfolding price action of a stock or the market as a whole since the trading decisions of the so-called big money manifests itself in the price action.
After all, isn’t it easier to be long a stock that is making new highs rather than you constantly rolling up your short? This is why trading in the direction of the larger trend (i.e., trend following) is such a popular trading strategy.
While the type of trading I generally do (intraday trading) can allow for both long and short positions (assuming there is enough intraday volatility and good risk/reward setups), I would much prefer to be trading in the direction of the larger timeframe than trying to scalp thirty cents in a counter-trend trade. This isn’t to say I won’t make an intraday scalp trades based on something I’m seeing on the intraday charts, but for me, trading in the direction of the trend is not only less stressful but it also allows you to pull more money out of the market on average.
With that in mind, I want to highlight two trades I made this past week in Facebook (FB): 1 short, 1 long. Facebook stock gaped up 14 percent after reporting earnings on January 27 after the close. The company crushed expectations. In the post-market, the stock was trading a couple of dollars away from its all-time highs, i.e., the longer-term trend of the stock was clearly up (see chart below).
Zooming in on the price action of the stock, I marked up my chart with levels I was watching for the day. As you can see in the second chart below, the pre-market high was around $109, the after-hours high was around $107, and post-market support was at $105.
With the stock gaping up by such a large amount, I thought there was a decent chance that there would be some profit taking on the open, as some longs sold into those previous all-time highs. I knew if I was going to be short the stock intraday, however, that I needed to mentally prepare myself to look to get long into that $105 post-market support if the stock pulled into that area due to the uptrend on the larger timeframe as well as the positive intraday fundamentals. As you can see in the chart below, the stock opened up around $107. I noted on StockTwits that if FB failed at $107 on the tape and was holding below VWAP. With the failure on the tape at $107 and VWAP nearby, I got short a small position. I want to emphasize the fact that I kept the size of my short position relatively small since it was a counter-trend, scalp, Move2Move type of trade, and therefore had a lower probability of working in my favor.
As the trade management chart below shows, I covered and got flat my intraday short position below $106. I then watched the stock pull into that key $105 level from the post-market. As you can see, I flipped long with a good amount of size into that $105 level, and the stock ended up topping out that day at $110.34. Again, I want to emphasize the fact that I put on a larger position size on the long trade because it was a higher probability trade (bullish long-term technicals, positive intraday fundamentals, stock is pulling into clearly defined support from the post-market, and defined risk with a risk/reward greater than 5/1).
I made a note on StockTwits that it’s alright to make counter-trend trades but you must be willing to flip in the direction of the larger trend as well.
In this particular trade, I recognized the fact that my intraday short on the open was a counter-trend trade, but just as important, I mentally prepared myself to look to flip long into support in order to trade in the direction of trend. The moral of the story is that making trades that are counter to the larger timeframe is ok depending on your trading strategy, but you should also be looking to trade in the direction of the big money and the underlying trend.
I hope you found this post helpful. Please let me know if you have any questions or comments. Thanks for reading.