Wednesday, August 22, 2012

Is this a trend reversal?

A trend follower never predicts the top or bottom of a move. They simply wait for confirmation that the current trend has ended, with an exit signal given. It is then a question of waiting to see whether another trend signal is given (and in which direction) which will determine their future trades.

The sharp move downwards today does not, on its own, signify a change of trend. It always mildly amuses me when people are quick to announce "That's it! The market has reversed". Trend followers NEVER predict. The clue is in the name - they simply identify a trend and follow it, until such point in time that the trend has ended. Trying to be 'clever' and pick these turning points is left to others. 

It is this that causes lots of people to lose a lot of money during strong trending phases, as they repeatedly try to pick a top or bottom in a market. Me, I simply wait for an appropriate signal. My goal in the markets is to make money - not to be proven right on an opinion - an important distinction. Following the trend gives ME the best opportunity to achieve that.

Pullbacks or retracements form part of a trend. Lets remember that the definition of a trend can be boiled down to a series of higher highs and higher lows (for an uptrend), and a series of lower highs and lower lows, for a downtrend. A robust trend following system seeks to take advantage of these trends, and attempts to treat these periods of volatility and small counter-trend movements as market 'noise'.

Take a look at a current chart of the Dow - as you will see, no exit signal from the current volatile uptrend has been given as yet. That's not to say than an exit signal will be given, but until that point in time a trend follower will have an upward bias in his stock holdings.

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