Meet Your New Best Friend

If you follow me in MTM’s Group Coaching class, you know I start almost every session by explaining what I do when there are higher highs and higher lows and vice versa. I say it for a couple of reasons. One is that you need sayings drilled into your head, and the other is to remind you to follow the trend more times than not.

The Trend Is Your Friend

The trend is your friend. How many times have you heard that famous saying? Probably too many times, right? Well, there are several sayings and reminders when it comes to trading that stand the test of time, and this is absolutely one of them. To me it is extremely important and a good reminder to look for opportunities when it comes to trends.

Getting an Edge

As option traders, we are always looking for an edge and to put the odds on our side. Heck, MTM founder Dan Passarelli even wrote a book called “The Market Taker’s Edge.” Looking for opportunities and being patient are essential to gaining an edge. To me an uptrend is an underlying that is setting higher highs and higher lows. I consider these highs and lows to be pivot levels. I tell the class to be patient and look for primarily bullish opportunities within the uptrend. I like to see pullbacks (buy setups) or pullbacks to support areas and look for reversals. With a higher high that correlates with resistance, I automatically look for two-bar bullish closes above that resistance level to confirm a break of resistance. Of course, there is no guarantee any of these setups will work, but to me I am putting the odds on my side.

On the flip side, an underlying that is setting lower lows and lower highs would be classified as a downtrend. Look for primarily bearish opportunities within the downtrend. I like to watch for rallies (sell setups) or rallies into resistance areas and look for reversals. With a lower low that correlates with support, I look for two-bar bearish closes below that support level to put the odds on my side that the underlying will continue to move lower or at least not higher. Once again it is an odds thing, but to me the odds are on my side.

Here's the Deal

The trend can absolutely be your friend and, in the case of an option trader, maybe even your best friend. As I like to say when looking at charts, what has a better chance of happening? If you can answer that question, you have an edge.

John Kmiecik, Market Taker Mentoring

Trader Education