Wednesday, April 11, 2012

There is no one trend

I came across this quote today from Ed Seykota, which provides food for thought:

"There is no such thing as the trend; there are countless trends, depending on the method we use to determine a trend… There is no way to determine the current trend, or even define what ‘current trend’ might mean; we can only determine historical trends."

Meaning? Depending on your chosen timeframe, and whether your preference is to capture short, sharp trends over minutes or hours, or longer term trends, over days weeks or even months, there are countless trends in play in the market at any one time. There is no one way to define a trend.

What may look like a counter-trend trade when looking at a chart in one particular timeframe, may well look like a perfectly normal trend following trade in a different timeframe. The danger is when traders switch from one timeframe to another (especially when they are sitting in a loss position) in the hope that the trade is given more leeway, and that ultimately the position will end up in a profit. This is where adhering to your stops is critical, as you don't want what was intended to be a short-term trade turning into a long term investment. Not only does this tie up precious trading capital, it also opens the possibility of having to take a much larger loss than was originally intended, causing significant damage to their equity balance.

Defining your preference for the type of trend you are trying to catch, using appropriate risk management, and then being able to match your chosen types of trend to the current characteristics present in the market should mean that you are able to profit from the markets.

No comments:

Post a comment