Method
Trading with the trend
Most teaching says to trade in the direction of the larger trend, especially while learning.
Studied, mixed
Some studies find something and others do not, or the result depends on the exact rule.
Time-series momentum is documented for one-to-twelve-month horizons. Short-horizon trend rules are mixed.
What it is
The reasoning is that a pullback entry in a trend has more room to run and a clearer place for a stop.
What it suggests
Trends at monthly horizons are measurable in futures and forward markets. At short horizons the evidence is thin, and the trend on a five-minute chart is a much smaller thing.
How to check it
State which timeframe defines the trend for the plan.
Common mistakes
- Calling a trend on the timeframe that suits the trade wanted.
Sources
- Moskowitz, Ooi and Pedersen (2012), Time series momentum, Journal of Financial Economics 104(2) (citation and headline finding only)
- Park and Irwin (2007), What do we know about the profitability of technical analysis? Journal of Economic Surveys 21(4) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.