Microtrends and risk aversion

Many a trader will have looked at the same chart (say AUDUSD) at different times (let’s say 4 hours apart), and had doubts or an urge to change their minds on what to do.

This situation occurred recently with BTCUSD. On one day it appeared that there was as strong microtrend on a 2H time frame pushing against the big bearish daily trend. Then on the next day it appeared that the 2H trend might fail. [What do I mean by microtrend? It’s any objectively observable trend that moves against a much larger dominant trend.] I changed my mind on three occasions in those days. Eventually I settled on holding the 2H microtrend going long and was prepared to accept losses. Some call this sort of postioning, ‘countertrend-trading’. I prefer to call it just ‘trend-following’. I’ve noticed that in the back of my mind the question, ‘Where is it going?‘ has come up a lot. Uncertainty about that leads to avoidance. But this is ‘strange’ because objectively I have my trend lines to tell me where it’s going.

Spotting a microtrend is not too difficult. But there is the psychological pain of knowing that the microtrend has a chance of failing. I recall what happened with Wall Street pre- and post-Trump election. The market took a deep dive but rebounded and moved north over a few days like a bat outta hell! I then look back and spot a strong 4H microtrend working hard against the big daily trend, and wondered “How the devil did I miss that!?” Well, the trend was there all the time! I didn’t miss it. I ignored it repeatedly. At each interval of looking at Wall Street I quickly thought, “The probability is for the south. Don’t enter.” Risk aversion – or fear took hold of logic, rather imperceptibly. This is not simply a ‘coulda-woulda-shoulda‘ situation. Why? No major trend would change if there wasn’t a developing microtrend. The big issue is whether one is willing to take the risk and how that risk is controlled in following the (micro-) trend.

See what happened with AUDUSD quite recently (see clickable chart).

When one is at the start or middle of a big trend (which later becomes clearer), it’s not easy. Doubt and risk aversion can take control of the mind. Risk aversion wouldn’t be such a big problem if there is adequate risk control. If one can control the loss – and if one truly accepts the loss in advance – why avoid it?

Conclusion:

Missing a big trend on any time frame therefore represents an accumulation of risk aversion and a related lack of risk control.