The Trend is a Lie

Here’s a little piece I wrote on my blog that got some pretty thought provoking responses… I thought I would share as its a good thing for new traders to look at.

I think that the trend is a lie, or at least not helpful to most traders. So whats the big problem with the trend?

First, the trend is BY DEFINITION LAGGING INFORMATION. For there to be a trend it has to have already occurred before you can define it yes? Then you are chasing lagging information, and typically doing so using more lagging information (i.e. moving averages, momentum oscillators, etc). This compounds an already huge problem even more. Whats the other issue?

The trend requires YOU to define it. You can give 100 traders an identical chart and each one of them will define the trend on the chart differently. Some will use market structure, others MACD on X setting, some using MACD on Y setting, and almost all using some combination of X, Y, and Z moving averages. So now not only are you trying to define lagging information, but you’re trying to do it in a manner where your opinion is supposed to be the one the market respects. Guess what? The market could give a **** about you. Cold hard truth I suppose but nevertheless true information.

Would you agree that most traders focus on the 20/50/100/200 ema’s because they figure most other traders watch these same moving averages? Which means what they are really trying to do is fix the problem of having them define the trend for themselves (because they recognize the futility of this) and figure out what the market (or at least the greatest majority of players in the market) is using to define the trend. But this isn’t the biggest problem.

Then you have those trend traders who do great on the runaway trends but get NAILED as soon as sideways consolidation happens. Most cop out by running to another indicator in an attempt to filter bad trades. Others run to the “define the type of day” defense as if its possible to figure out what type of day (trend or range bound) will follow after the first X amount of time passes in the market. Seriously? I think most of us who have traded a while understand that at any point in time ANYTHING is possible. The worst chop in the morning can turn into a massive trend day, and the best trend day can stop and coil sideways for hours. To suggest that we can accurately define something that BY DEFINITION has to have already occurred to be defined ahead of time is bull****.

Can anyone tell me what the rarest type of day is in the S&P 500? You win an e-high five if you answered “Straight trend day”. Most days are range bound most of the time. We all know in the back of our minds that a straight trend day is an exception rather than the rule. As traders we should really try to identify the rule rather than the exception… but most don’t.

But the problems continue when we start to look at the actual mechanics of entering a trade based on lagging information. If the trend must have already occurred (at least partially) to get confirmation to enter the trade (MA crossover, stochastic flip, etc) then price is typically already a pretty far distance away from where it was when the actual trend started. This leaves us entering into the market at an area where price is usually already at another decision point in the market. The difference being that by entering now we are going into battle with a much larger amount of risk (we have to put our stops down where the trend started if we don’t want to get stopped out) but whats worse is we are going into battle at a turning point in the market with open risk on our position. The smart traders are able to get in where the trend actually started and go into this same turning point battle with their stops at par. Which would you prefer?

Then there is the simple logistics of what you are asking the market to do for you. Lets say you’re a smart and savvy trader that knows they need to achieve 2X their initial risk or better on a trade to make their account grow. Good idea. Problem is that the larger your initial risk, the larger the move you need the market to achieve. So if you are entering with your larger initial risk based off your lagging trend information you have to ask the market to go much further in favor to get a needed outcome. By contrast if you were able to get in where the trend started you could use so much less risk that the market has to achieve relatively small goals to get you out of your trade with 2X the risk or greater. And the truth is it is much more probable for a market to move a smaller distance than a large distance.

And most traders can’t figure out why they lose money? Most traders look to identify the trend and get trapped into this vicious catch 22 where the odds literally are stacked against them. The trend may or may not exist but the point traders need to realize is that whether it does or does not exist, it isn’t profitable to try and define it.

Still want a moving average on your chart?

Still lagging information because its already occurred, and just because he defines it that way doesn’t mean the market cares that he defined it that way.

I hear ya Daedalus :wink:

In that chart I see 2 trends, the longer term down trend (thick red line) and the current uptrend (orange line). Yes a 5 year old could probably tell you what’s it’s BEEN doing and where it’s at…BUT…will it break to the upside of that thick red trend line and continue up the orange line, or will it bouce off it and continue to the downside below the orange line?..I don’t think a 5 year can tell you that…:rolleyes:

I see the merit in both lines of thought.

It reminds me of the saying (paraphrased) “A true sign of genius is being able to entertain two completely conflicting ideas & still be able to function.”

I think the safest way to trade a trend in the real world is to have bought at the bottom of a range, and then allowing the position, or a portion of it, to breakout of the range and continue in the direction of a trend which was non-existent prior.

So, in a sense, trade them when you realized you’ve entered one inadvertantly…

I think this is a good discussion. Outside the box.

Dude, forget all the indicators and just draw a line on the higher highs and higher lows in an uptrend and vice versa. You trade the breakout of the line, which tells you that sentiment might have changed.
If you want a guide and that’s all it is stick a 21EMA envelope and adjust the standard deviation but better still just draw support and resistance lines on your chart.
The only person who would look at that chart and say the trend is down is a long term trader. Any day trader will be trading the current uptrend and probably on a 1hr or 4hr chart. :slight_smile:

would you also agree that trading based on indicators is also futile?

Trend lines and fib retrace.

That would depend on the indicator and the trader. Not all indicators are created equal. A range indicator doesn’t lag and provides useful information. A support resistance line plot helps you to see what price did and where it may do it again.

Have you read Taleb’s books?

I think you are stretching the definition of lagging into absurdity. There is past, present and future. Past information is history. That is not the same as lagging.

The market can’t “care”. But you must have a real point or are you just venting?

He’s made a valid point, periods of consolidation ruin longer straight-line predictions or lagging indicator. But doesn’t the EMA crossover try to take that into account? Maybe it just means we need to calibrate the indicators during tight spots.

I’m thinking that the trend/macd phase worked years ago while things were actually trendy - with the instability we’ve run into particularly right now during a range-bound june-july (with gbpusd anyway) its the scalpers that seem to come out on top. A friend of mine who went down 18k or so pulled back even in a week just by firing and forgetting without a stoploss. That said I’m fairly clueless myself, having blown 1k worth of several hundred dollar refills over the past few months isn’t a good sign of my credibility lol

Can’t hurt to figure out what the majority rules and play their game instead (this is TA after all) and if it’s trendlines and MAs then why not

Of course none of this is any new information and it has every hint of a vent but there’s no better place than newbie island right? Better regurgitating bad experiences than revenge trading

I don’t think this makes me a genius, but I will ALWAYS consider the market I’m trading from both the long and short point of view. You can and should of course have your own opinion, but the key is to just for a minute pretend that you are trading the opposite position. This gives great insight into what the “other team” might be planning to do in the near future.


My real point was to get this discussion going.

As far as lagging information getting stretched into absurdity - I don’t think I crossed the line just yet. Price is an input to every indicator yes? Then by definition every indicator is lagging yes?

This is my point… look at this trade that just happened… double top in the eurjpy yes? great… same pattern, two different entries, one off of a leading indicator, price, the other off of a lagging (but still fast, smoothed, adaptive Hull Moving Average on a 21 period setting). Feel free to substitute whatever lagging indicator onto the chart… the end result is still the same.

Two different entries, two different exits… if you are going for 2X your initial risk… which move is more probable to occur? Which move uses less risk? Which move gets you to par before another S/R area comes into the picture? Which move will happen the most often?

just food for thought.

So basing it on price, are you confirming this based on the formation of the candle or the price failure to break through resistance?

Actually both… first off, I would only trade around prior S/R and then I would use a leading indicator like price to get me into the trade, ie candlestick patterns or something similar…

How is the answer no? Range, distance from open, candle color, ARE PRICE and thus, are not lagging. If you want to get into semantics about price being “leading” or “real time” go for it. My only point is that price gives the most up to date information about what is going to occur on the very next bar.

I wouldn’t exactly describe those as indicators in the same sense as moving averages or ADX, stochs etc. They are more informational instead of having to write it down on a piece of paper or in a spreadsheet, or flip thru various timeframes to keep track of it all.

On the other hand, if one combined those info indicators together to give a signal of some kind, then they could become lagging too…no? :smiley:

Absolutely correct!!

I agree!! :slight_smile:

An indicator can become a leading indicator when we consider [U]divergences.[/U]

This can be done on many indicators such as Stochastic, MACD, rate of change, trix, mmacd, macd/dema and so forth.

What’s the point again?
Don’t use indicators?