Chapter 6

Trends --- The Only Thing Worth Trading

One Sunday morning in late November, Rohan arrived at KM Sir's flat with a question he had been building up for a week.

"Should I be buying or selling right now?" he asked, before he had sat down.

KM Sir was standing at the kitchen counter with his filter coffee. He looked at Rohan with the same expression he brought to most questions --- the expression of someone deciding whether the question was worth answering or worth replacing.

He set his coffee down. He picked up his notebook from the table. He opened it to yesterday's page, read the line he had written the previous morning, closed it, and set it on the table.

*Trading with the trend is not excitement. It is precision.*

Then he said: "What is the market doing?"

"That's what I'm asking," Rohan said.

"No. That's what I'm asking."

The answer, once Rohan had pulled up the chart and looked at it properly, was that the Nifty 50 had been in a clear downtrend for the last five weeks. The high it had made four weeks ago was lower than the high before it. The low it had made three weeks ago was lower than the low before it. Lower highs. Lower lows.

In the course of those five weeks, Rohan had placed eleven trades. Nine of them had been buy trades. He had lost money on eight of the nine.

He had been buying in a downtrend. Not because he had analysed the trend and made a decision to trade against it. Because he had not looked at the trend at all. He had been looking at individual setups --- a support level here, a candlestick pattern there --- without asking the most fundamental question about the market he was operating in.

Which direction is it going?

"You have been bargain hunting," KM Sir said.

"What?"

"Every stock that dropped, you thought was cheap. Every level that held briefly, you thought was a bottom. You were buying things because they had fallen, not because the direction of the market gave you reason to expect them to rise."

Rohan looked at his trade list. He had called it "oversold" seven times in three weeks, and seven times it had gone lower.

He had called it oversold seven times in three weeks, and seven times it had gone lower.

KM Sir spent the next hour explaining how to identify a trend, starting with the only definition that mattered in practice.

An uptrend: higher highs and higher lows. Each new peak in the price is higher than the previous peak. Each new trough in the price is higher than the previous trough. The market is making net progress upward over time.

A downtrend: lower highs and lower lows. Each new peak is lower than the previous peak. Each new trough is lower than the previous trough. The market is making net progress downward over time.

A ranging market: neither condition is consistently present. The price moves between a floor and a ceiling without making net directional progress. Sometimes called sideways, sometimes called consolidation.

"The first question before any trade," KM Sir said, "must be: which of these three conditions is the market in? If it is in an uptrend, you look for reasons to buy. If it is in a downtrend, you look for reasons to sell --- or you do not trade. If it is ranging, the correct action depends on your method, but the default for a beginner is often: do not trade."

"Why not trade in a range?"

"Because in a ranging market, the stops are tight and the moves are unpredictable. You will be stopped out of legitimate positions repeatedly. A ranging market is expensive for beginners. It is manageable for experienced traders who have specific methods for ranging conditions. You are not yet an experienced trader."

The concept that Rohan had been violating, without knowing it, had a name: trading with the trend.

It was one of the oldest principles in technical analysis and one of the most consistently ignored by retail traders. The logic was not complicated: in a trending market, the probability of a move in the direction of the trend is higher than the probability of a move against it. This is not because trends are permanent. It is because trends, while they last, represent a genuine imbalance between buying and selling pressure. Trading in the direction of that imbalance improves your odds.

Trading against a trend --- trying to pick the bottom in a downtrend, trying to short the top in an uptrend --- required a specific skill that Rohan did not yet have: the ability to identify with accuracy when a trend was ending. This was one of the hardest things in technical analysis. Experienced traders could do it with some consistency. Beginners attempting it were overwhelmingly more likely to simply lose money in the direction of the trend while believing they were making a contrarian play.

"The trend is your evidence," KM Sir said. "If you do not know what the trend is, you have no evidence for any trade. You are guessing."

Rohan thought about his nine losing trades over the previous five weeks. He had called each of them an opportunity. He had believed, at the moment of entry, that he had a reason.

He had not had a reason. He had had a hope.

There was one more thing in this chapter that cost him something to learn, and it cost him nothing in money.

KM Sir asked him, toward the end of the session: "What would you have done last week if you had known the market was in a downtrend?"

"I would have waited for a short opportunity," Rohan said.

"And if no clear short opportunity appeared?"

Rohan thought about it. "Nothing? Wait?"

"Yes."

This was harder than it sounded. Rohan had, by this point, been checking the Kite app every morning and evening for almost two months. He had been looking for trades. The discipline he was being asked to develop was the discipline of looking for trades and finding none --- and finding this acceptable.

Not trading was not inaction. It was a decision. In the right market conditions, the best trade was no trade.

He had lost ₹28,000 of his original ₹40,247 in losses making trades he should not have made. Some of that money represented trades against the trend in conditions that did not support his entries. If he had simply not traded in those five weeks --- if he had recognised the downtrend and waited --- his account would be smaller by far less.

The most expensive skill in trading, he was beginning to understand, was not knowing when to enter. It was knowing when not to.

He wrote this in his notebook with a line under it.

He did not fully believe it yet. But he had written it down, which was a start.

KM Sir had a phrase he used once in this chapter that Rohan wrote in his notebook immediately and returned to for the rest of his trading life: the trend is your employer. You work in its direction or you do not work at all.

The implication was not that trends were permanent. They ended. They reversed. Sometimes they ended in ways that experienced traders could anticipate and trade against profitably. The implication was that for a trader without the specific skills to identify trend endings accurately --- which required months of practice and a specific set of tools --- working against the trend was working against the most powerful structural force in the market.

He had been doing this for eleven trades without knowing it.

The practical method for identifying trend, beyond the simple definition of higher highs and higher lows, involved looking at three things.

The first was the 50 EMA, which he had not yet studied in detail (that came in Chapter 7) but which KM Sir mentioned as the tool he used to confirm what the price structure was already showing him. If price was above a rising 50 EMA, the trend was confirmed as up. Below a falling 50 EMA, confirmed as down.

The second was the structure of the recent swing points. He had to find the last two significant peaks in the price and the last two significant troughs. Were the peaks higher or lower than each other? Were the troughs higher or lower? This told him, without any indicator, whether the market was making progress.

The third was the context of the move. A price that had been falling for three weeks but was now in a strong one-day bounce was not necessarily in an uptrend. A one-day move within a longer trend was noise. He had to look at the right timeframe to get the right answer.

"Always start with the weekly chart," KM Sir said. "Then the daily. The weekly tells you the major trend. The daily tells you the medium trend. These two should agree before you trade. If the weekly is down and the daily is trying to bounce, you are looking at a correction within a downtrend --- and corrections within downtrends are usually short-lived."

He went back to his eleven losing trades in the downtrend and identified what each of them had looked like on the weekly chart at the time of entry.

Nine of the eleven had been entered during a period when the weekly chart showed a clear downtrend: lower weekly highs, lower weekly lows, and the price consistently below the weekly averages. He had been ignoring the weekly chart entirely. He had been making trading decisions from the daily chart without asking whether the daily chart was swimming with or against the tide of the weekly.

This was, he thought, the equivalent of planning a cycling route without checking whether it was uphill or downhill.

Two of the eleven trades had been entered when the weekly chart was genuinely ambiguous --- the market was ranging on the weekly level. These were the trades where his daily-level analysis had at least been operating in a neutral context. Both of those two had been smaller losses than the rest.

The relationship was not perfect. But it was clear enough to act on.

"Multiple timeframe alignment," he said to KM Sir. "The weekly and daily need to agree."

"Yes. And the setup needs to occur on the daily when you have confirmed the weekly. If the weekly is bullish, you wait for the daily to give you a bullish setup. If the weekly is bearish, you wait for the daily to give you a bearish setup. If they disagree, you wait for them to agree again."

"And if I am waiting and the market moves without me?"

"Then the market moves without you. This will happen often. There will always be moves you do not participate in because the conditions were not clear. That is not a failure. The failure is entering unclear conditions and losing money. Every trade you do not take that would have lost money is a success."

He wrote this down. He did not believe it yet, not completely. The idea that not trading was a success required a redefinition of what success meant that he was not yet ready to make fully.

He would be ready by Chapter 9.