The Core Principle of Successful Trading

Trading methods come and go. Some of them are software-based, programmed from purportedly top-secret algorithms that claim to make profits with little or no involvement from the trader whatsoever (simply plug 'n play and you're a millionaire!). Some would avoid the automation route in favor of chart patterns so extremely complex that by the time you've finally recognized them, the trading opportunity has come and gone.

There is one principle however, that is not only much more simple and easier to understand and to see on your charts, but which also stands the test of time as the highest probability route to success in trading. That principle - which you have surely heard before - is as follows:

Buy the Dips in an Uptrend, Sell the Rallies in a Downtrend

Simple, isn't it? And yet so many traders, even after hearing the advice, fail to apply it in their trading. Instead, they spend much of their time trying to find the latest indicator-driven strategy, or spending thousands of dollars on those fancy charting packages (only to learn later that they didn't measure up to the sales hype). Others would give in to the temptation of chasing a  non-trending market, for fear that they would end their trading session feeling they failed simply for not taking a trade.

If you want to make your trading endeavour a success and also a whole lot easier, then make it your mission to buy the dips in an uptrend, and sell the rallies in a downtrend. OK, so as simple as it sounds, what exactly do we mean with this principle and why is this so crucial?

Firstly, note that we are trading with the trend, not against it. We buy in an uptrend and we sell in a downtrend. However, it does depend on the degree of the trend: the higher up you go (for example, to a Weekly chart) the longer the duration and the more distance covered in the significant counter-trend moves, which may in fact represent decent trading opportunity. But as a general rule of thumb - especially for day trading styles - buying the dips and selling the rallies means aligning ourselves with the market flow, the direction it is heading on the timeframe we're looking at, which is the path of least resistance.

If we do the opposite, for example, selling the rallies in an uptrend, we put ourselves in the direction of a corrective action, which can be a really bumpy ride. Corrective action tends to be unnatural, prone to whipsaws and market 'noise'. Its price targets are often much more difficult to hit, and less reliable. A trending market, by contrast, tends to move more smoothly and effortlessly towards its objective, more linear than overlapping in appearance. Putting ourselves on the right side of the trend allows us to take advantage of those really big moves that can be very profitable. 

As shown in the chart below (showing green arrows for buys, red arrows for sells), the other advantage of buying the dips and selling the rallies, is that it minimizes risk. In a trending market, a correction should only go so far. Once it's exhausted, the return to trend can be relatively quick - in other words, the market moves off the counter trend extreme with little hesitation. If we jump in at that point, then there is a much lower chance that the market will tum against us later, triggering a stop. This in turn allows precise entry points with limited risk to be set. 

In order to buy the dips and sell the rallies, we need an analytical approach that effectively comprises two  components. Firstly, we need a reliable method of identifying a market that is trending. It is going to be difficult to sell the rallies in a downtrend if we don't even know whether we are in a downtrend. Secondly, we need a reliable method of identifying the retracements (the dips in an uptrend or rallies in a downtrend): where they start, where they are likely to end, and some sense of certainty that they are merely a pullback. 

There is no point in selling a rally in a downtrend if that rally is expected to confirm a reversal. Therefore, we need to understand how to detect these important components of price action relatively unaided. This means that we need to start developing a general idea for what trending markets and retracements tend to look like on the chart with recourse only to price action itself.

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