Wednesday, November 07, 2012

Interesting times

Despite the markets' best efforts, the downtrend in the US indices appears intact. Over the last few days EUR/USD (chart below) has also joined the party and given a short signal. The key drivers or catalyst as to the price direction in an index, currency or a stock are an irrelevance to a true trend trader. Price is all that matters.

All a trend follower needs to have to make money is a trend. The system employed will give you the entry and exit points - it's all a question of follow the signals and hopping on for the ride. In which direction the market goes does not matter, as a trend follower should be comfortable in trading either long or short.

The dangers to a trend follower are both a lack of direction, where the market or instrument is in a non-trending state, and/or high volatility, in which you can get the market direction correct, but end up getting stopped out to excessive price 'noise'.

The price channels used are one way of trying to ensure that you allow the instrument sufficient 'wiggle room' to allow a certain degree of this volatility, but not too much so that there can be a significant erosion of open profits before a stop is hit. These parameters are determined by the trader and form one element of an overall trading system. Like with all things trading related, there is no sure-fire method, and these factors, along with choosing the desired timeframe, the employment of prudent risk control, exerting discipline in applying your chosen method and the ability to accept risk every time you open a trade will determine whether you will be a success over a long haul or will fall by the wayside.

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