Monday, June 11, 2012

Trend followers and noise

Trend followers only get involved in a market when they receive a signal that a new trend is taking shape, as per their system rules. When there are minor reactions or movements on an intra-day basis or over a much shorter period/timeframe than they trade, these are considered to be 'noise' on a market and are of no consequence. These can occasionally frustrate trend followers in the sense that a short-lived counter-trend move (like we have seen over the last week or so, culminating in the gap up today), and/or sudden increase in volatility can knock them out of existing positions. Again, there are no 'fail safe' methods of trading in the markets - you need to find your niche, control your risk, and act upon the entry and exit signals you receive.

The point I am trying to make is that trend followers only act when their system obliges them to do so. A major part of their success is that they stick rigidly to what their system tells them to do - after all, what is the point of trading a system if you decide to override the entry/exit signals???

Trend following can be seen almost to be 'boring' - you receive a signal, you act on it. A good trend following system employs rules that anybody with a passing interest in the markets can understand. Keeping it simple in this manner has been consistently proven over a number of decades to produce big returns. Even trend following greats such as Richard Dennis have stated that overriding their rules has cost them money, so the temptation to do so is not restricted to you or I. The less you can do it, and adhere to the rules, the more you will make.

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