Trading the Trends
Fred McAllen
42 min
8 Key Points
4 RateWhat's inside?
Explore the art of stock market trading with a focus on identifying and capitalizing on market trends for maximum profit.
You'll learn
1. What's up with market trends?2. Spotting and guessing market trends - how?3. Trading strategies that go with the flow4. Keeping it safe in trend trading5. Making a game plan for disciplined trading6. Making more, losing less with trend trading.Key points
01Why Do Most Traders Lose Their Money?
Walking into the financial markets without a proper education is a lot like stepping into a professional boxing ring blindfolded. You might throw a few lucky punches and hear the crowd cheer, but it is only a matter of time before you get knocked out. Fred McAllen begins Trading the Trends by addressing a sobering reality that the financial industry rarely advertises: the vast majority of retail traders and investors lose their money. They watch their accounts slowly bleed out or suffer catastrophic losses during sudden market crashes. But why does this happen so consistently? The answer does not lie in a lack of intelligence or a lack of effort. Overwhelmingly, people lose money because they are playing a game they fundamentally do not understand, using tools that are actively working against them. The primary trap that catches almost every beginner is the obsession with forecasting. Human beings have a natural desire to predict the future. We want to know what the weather will be like tomorrow, who will win the championship next week, and where the stock of our favorite tech company will be in six months. In the financial markets, this desire manifests as a dangerous obsession with calling tops and bottoms. Traders constantly look for the exact moment a falling stock will turn around, hoping to buy at the absolute lowest penny. Conversely, they try to predict the precise second a rising market will peak so they can sell and look like a genius. McAllen points out that this is an exercise in pure ego. The market does not care about your predictions, your fundamental analysis, or how smart you think you are. Trying to catch a falling stock is often referred to as trying to catch a falling knife; you are much more likely to get severely cut than you are to perform a miraculous trick. To understand why traditional approaches fail, we have to look at how the average person gathers financial information. Most people rely on financial news networks, newspapers, and online forums. They listen to analysts in sharp suits who confidently declare that a particular company is undervalued or that the broader economy is heading for a recession. The problem is that by the time this information reaches the public, it is completely useless. The large institutional players—the banks, hedge funds, and massive asset managers who actually move the market—have already acted on that information days, weeks, or even months ago. When the news finally announces that a stock is a "strong buy," the smart money is usually using that surge of public interest to sell their shares at a premium. The retail trader buys at the top, the price suddenly drops, and the trader is left holding the bag, wondering what went wrong. McAllen introduces a radically different philosophy: you do not need to know what the market is going to do tomorrow in order to make money today. You only need to know what the market is doing right now. This is the essence of trend following. Instead of trying to outsmart the market, you surrender to it. You accept that the market is a massive ocean current, and you are just a small boat. If the current is moving north, you point your boat north. You do not try to build a dam, and you certainly do not try to row south just because you feel like the current "should" change direction soon. This brings us to the core concept of the book. Price action—the actual movement of an asset's price on a chart over time—is the only undeniable truth in the financial markets. Earnings reports can be manipulated with clever accounting. Chief Executive Officers can lie on television. Financial journalists can be completely disconnected from reality. But the price chart cannot lie. It represents the aggregate sum of every single transaction, every ounce of fear, every drop of greed, and every piece of insider information in the world at that exact moment. If a stock is going up, it means that buyers are more aggressive than sellers. That is the only fact you need to know. Adopting this mindset requires a significant psychological shift. We are taught from a young age to buy low and sell high. While this sounds like perfect common sense, in the financial markets, it often leads to disaster. Buying low usually means buying a stock that is in a heavy downtrend, plummeting in value. You think you are getting a bargain, but you are actually stepping in front of a freight train. McAllen argues that a much more profitable strategy is to buy high and sell higher. You want to buy an asset that has already proven it has the strength to rise. You want to jump onto a train that is already moving smoothly down the tracks. Throughout this summary, we will explore exactly how McAllen teaches us to identify these moving trains. We will learn how to strip away the confusing noise of the financial media and the cluttered mess of hundreds of technical indicators. We will focus on the pure, unfiltered language of price and volume. By the end, you will understand that trading is not about predicting the future; it is about recognizing the present reality and having the discipline to align yourself with the dominant forces of the market. Let us begin by breaking down the very foundation of market movement and how to read the hidden language written on every price chart.
02The Hidden Language of Market Price Action
If you were dropped into a foreign country where you did not speak a single word of the local language, you would find it incredibly difficult to navigate. You would not know how to order food, ask for directions, or understand the warning signs on the road. Looking at a financial chart for the first time is a very similar experience for most people. They see a jagged sequence of red and green lines bouncing randomly across a screen, looking more like an erratic heartbeat monitor than a roadmap to financial freedom. However, Fred McAllen emphasizes that the market does have a language, and it is entirely based on price action. Once you learn the vocabulary and grammar of this language, those random jagged lines transform into a clear, readable story. The foundation of this language relies on a concept that is over a century old, known as Dow Theory. Charles Dow, the founder of the Wall Street Journal and the creator of the Dow Jones Industrial Average, laid down principles in the late 1800s that remain the absolute bedrock of technical analysis today. Despite the invention of high-frequency trading algorithms and complex derivative markets, human psychology has not changed, and therefore, the way price moves on a chart has not changed. Dow’s most critical contribution was defining exactly what a trend is. It sounds like a simple question: what makes an uptrend? Most people would just say, "The price is going up." But McAllen teaches us that we need a strict, mathematical definition to remove human emotion and bias from our trading. An uptrend is formally defined as a series of higher highs and higher lows. Think about walking up a staircase. You step up to a new height a higher high, but then you have to pause and lift your foot for the next step. During that pause, your foot dips slightly, but it does not go all the way back down to the ground floor; it rests on a step that is higher than the previous one a higher low. The market moves in the exact same way. It never goes straight up in a vertical line. It surges forward, creating a new peak, and then it pulls back as some traders take their profits. This pullback creates a trough. As long as that trough is higher than the previous trough, the uptrend is perfectly intact. The buyers are still firmly in control, stepping in at higher and higher prices because they are eager to own the asset. Conversely, a downtrend is defined as a series of lower highs and lower lows. Picture walking down those same stairs. The price drops sharply, creating a new low. Then, it bounces up slightly as bargain hunters step in, creating a peak. But this peak is lower than the previous one because the sellers are aggressive and want to dump their shares before the price falls further. The bounce fails, and the price crashes down to an even deeper low. This is the footprint of a market controlled by fear and selling pressure. Why is this simple definition so profoundly important? Because it completely removes the need for guesswork. If you pull up a chart and you can clearly see that the price is making higher highs and higher lows, you are in an uptrend. Your only job is to look for opportunities to buy. You do not need to ask a television analyst for their opinion. You do not need to read the company’s quarterly earnings report. The chart is screaming at you that the demand is greater than the supply. If you see lower highs and lower lows, you are in a downtrend. You must either sell your positions, look for opportunities to short the market, or simply stand aside and protect your capital. McAllen warns against the modern trader's tendency to clutter their screens with dozens of technical indicators. It is very common to see a beginner's trading screen covered in Moving Average Convergence Divergence MACD lines, Relative Strength Indexes RSI, stochastic oscillators, and Bollinger Bands. The chart becomes a messy web of colorful lines, and the actual price is barely visible. These indicators are mathematically derived from the price itself. They are secondary sources of information. Why rely on a delayed mathematical formula to tell you what the price is doing when you can just look directly at the price? Price is the ultimate leading indicator. It is the raw data. To read this raw data effectively, we must also understand the concept of support and resistance. These are the invisible floors and ceilings of the market. Support is a price level where a downtrend tends to pause due to a concentration of demand. Think of it like a trampoline. The price falls, hits the support level, and bounces back up because buyers believe the asset is a great value at that specific price. Resistance is the exact opposite. It is a price level where an uptrend tends to pause due to a concentration of supply. It acts like a glass ceiling. The price rises, hits the resistance level, and falls back down because sellers believe the asset is overpriced and they rush to take profits. These levels are created by collective human memory. If a stock falls to $50 and then massively rallies to $100, traders will remember that $50 was an incredible buying opportunity. Months later, if the price returns to $50, those traders will eagerly step in to buy again, reinforcing that price as a strong level of support. However, support and resistance are not unbreakable titanium walls. They are more like wooden doors. If the market keeps pounding on a resistance level over and over again, eventually, that door will splinter and break. When a resistance level is finally broken, something magical happens in the language of price action: old resistance becomes new support. The ceiling becomes the new floor. Traders who sold at the resistance level realize they made a mistake as the price shoots higher. When the price eventually pulls back to that old breakout level, those same traders rush in to buy, hoping to correct their mistake and get back into the trade at a fair price. This creates the higher low we talked about earlier. By simply identifying these peaks, troughs, floors, and ceilings, you can read the story of the market with incredible clarity. You are no longer guessing; you are translating the undeniable language of supply and demand.
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03Decoding the Four Phases of Every Market
04Drawing Lines That Actually Make You Money
05Volume Is the Fuel Behind Every Trend
06The Psychology of the Crowd and You
07Conclusion
About Fred McAllen
Fred McAllen