Sunday, February 17, 2013

Let price show you the way

The irony in predicting a market top or bottom is that, as price goes further against you, any fundamental or economic argument underpinning your prediction will look more and more attractive. Particularly if those who do the predicting have a large following, they can be 'tied' to that prediction and therefore have to find other arguments to back up their original forecast, to appease their followers. Yet, price continues to move against them, causing losses in the accounts of those who blindly follow someone else's trades.

There are plenty of examples of those people who were able to call such a market turn, who have lived off that prediction for years, despite being continually wrong since then.

Trend followers approach the markets from the opposite direction. They say to price "Show me, and I will follow". They have no pre-conceived notions either on the price direction, nor the magnitude of the trend. By the same token, trend followers are able to switch the direction of their trades from long to short in an unemotional fashion - they are not tied to a previous prediction that may be in the public domain.

I know of some people who have been predicting a major upturn in the fortunes of the precious metals for the last two or three months. Yet a quick look at the charts show that price is currently going in the opposite direction (charts of gold and silver below). Given the current economic outlook, the fundamental arguments that may supposedly back up an upwards movement will be looking even more appealing. Yet price is saying currently something else.

If you are one of those people who trade your fundamental beliefs, rather than by solely tracking price, a far better approach would be to continue to trade in the direction that your research tells you, but to use a trend following technical approach as a timing device. So, at the current time, if you believe that gold and silver will be going up, wait for the appropriate signal to enter.

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