Monday, July 02, 2012

Brightpoint Inc and the ability to switch sides

I'm showing a chart here of US stock Brightpoint Inc which shows how trend followers can have the ability to switch from short to long in a matter of days.

This stock had been in a pronounced downtrend since the beginning of February, which would have generated healthy profits - no exit signal was given until at just north of $5. There then followed a period of consolidation, and a failure to break to new lows, before a new long signal was given last week, also just above $5. Then today, a buyout has been announced, sending the stock price up over 60%. So again, simply following the trend would have meant you would have profited in both directions, whereas an investor who had held from the beginning of the year would still be showing a loss, even after the acquisition announcement.

Now, not everyone has the stomach or even the desire to trade both on the long and short side. By the same token, a lot of people (including me) do not like having their capital tied up for months or even years waiting for an investment to come good. I prefer to go with the flow (the trend) and try and profit from those moves up and down over a shorter period of time.

I also know that there are other systems and methods out there that can generate profits just as good as mine, if not better, by using a completely different method. All I know is that trend following suits my personality and makes perfect sense to me when looking at a chart of a stock or instrument. It is also one of the methods whereby you can literally spend a few minutes a day updating your existing positions, and/or adding new ones, and then let the market do its thing. All the emotional is taken out of the trade PROVIDING you use good risk control. And finally, you have to be able to act on the entry signals given. How many people would have gone long on Brightpoint after the pronounced downtrend? If your overall risk parameters allowed you to take the trade, and it generated a valid signal, then you should have acted upon that signal.

Let's be blunt - the purpose of trading is to make money. How you do that is by being faithful to your own method, use appropriate risk control, and to follow your entry and exit signals as they appear. This is the same whether you are a trend follower, use short-term overbought and oversold indicators, or any other system. Providing your system is proven over a sustained period of time and generates a positive expectancy, you should be able to trade, with no emotional attachment as to the instrument you trade, or in which direction you are trading - different strokes for different folks.

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