Friday, April 06, 2012

Why trend followers ignore indicators

Here is the latest chart for Apple, which has seen a beautiful trend since around Christmas time. As readers will know, pure trend followers do not use indicators to tell them to enter or exit positions, or to identify overbought or oversold markets. If you doubt this, just look at the readings on the stochastics and RSI that I have put in on the chart. If you used these indicators or something similar, you can see that these highlighted an overbought condition way below the current price.

In addition, those who identify a trend, but use indicators to highlight pull backs and 'low risk' entry points, would never have got into this trade. This is a great example why trend followers solely focus on price to make their trading or investing decisions.

Remember that trend followers never know which trade will turn into a loser, or into a winner like this Apple trade. Therefore you need to ensure that you follow the trend right to when you get the appropriate exit signal. That way, a large trend like this covers your losing traders as well as leaving you a surplus which is your net profit.

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