Tuesday, February 19, 2013

Is this trend near the end, or is it just beginning?

I think it's clear to see from the collection of charts below of various worldwide indices that the line of least resistance is to the upside, and has been for a while. It's about time since we were getting trends like this in the general market, that last more than a few weeks. If you are trading stocks on the long side, then the underlying trend of the general market will provide a degree of additional support.

These charts also clearly show that, when a trend does take hold, how easily overbought and oversold indicators can be rendered useless. A trend follower simply observe the movement on price, and does not need the 'crutch' of an indicator (far less an oscillator) to assist them in their decisions.

As a result, a trend follower never places a restriction on how far a trend will go, and most certainly will not exit a trade because price has moved a certain distance. A trend following methodology is designed to chase absolute returns. As a rule, trend followers struggle when there is no trend (kind of obvious really!). When conditions are more favourable, and when combined with good risk control, it is those kind of periods where trend followers make their money.

I referred to this in a post on here in early December:

"...while it is frustrating and disappointing to have suffered the last few weeks, I am able to satisfy myself that, in the main, I have traded in accordance with my plan, and that the market conditions have undoubtedly contributed to the losses made.

I also know that those on the other side of my trades, who like volatility and range-bound or non-trending markets, will take the pain when a pronounced trend does occur, and the losses I have made will be more than recouped."

Well now it seems that the tables are turned. The only difference is that we are not restricted in how far price can move in our favour.

These trends could end tomorrow, they could end in six months or more. The trend may actually only just be getting going. Remember Jesse Livermore's famous saying "the big profits are made in the sitting", meaning that, once you get into a trend, you stay in it until you get the appropriate exit signal.

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