Sunday, January 22, 2012

Want to make big money?

In late 1999 and early 2000, there was a tremendous advance in the markets with the advent of the dot com bubble. Millions were made as high momentum stocks rose steeply, seemingly with little or no substance to their underlying fundamentals in a lot of cases.

More cautious investors and traders stayed away from these stocks as a result, and missed out on those huge profits.

During this period, trend following was seen as 'old school', and out of date with the modern market.

However, in early 2000 the markets peaked, and then proceeded to fall sharply as the dot com bubble well and truly burst, and the bear market took hold. A lot of those same traders lost a substantial sum of those paper profits, as they had no suitable exit strategy. Some even ended up riding those stocks all the way up, and then back down again.

At the same time, trend followers had safely banked their profits generated before the bubble burst, and were now either out of the market or were making even more money on the short side as the bear market took hold.

Roll forward to 2008 and then 2009, and the situation was turned on its head. Trend followers simply followed what their systems were telling them, and made huge profits on the short side, before changing horses in the spring of 2009 as the general market trend turned upwards.

The fact of the matter is, by simply following the trend, and having a sound trading system, you can make money when the markets are trending upwards OR downwards.

As I've mentioned on numerous ocassions, the most difficult markets for trend followers are where there is simply no trend to follow. But then, all you can do is to act when a trend signal is given, and wait and see if a meaningful trend develops.

This means that I will never get in a positions right at the top or bottom, but by the same token, I will make the big money when a significant trend occurs, as I have clearly defined rules for when to enter, and more importantly, when to exit a position.

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