Friday, March 29, 2013

Following price trends in both directions

Here's another recent example of a stock which has trended one way, then the other. This is an Italian bank stock, which gave a valid long signal in mid December and led to profits being taken after an exit signal was given towards the end of January. What is interesting though is what happened next.

After falling in early February, it consolidated over a couple of weeks before giving a valid short signal towards the end of that. This has led to an even more profitable trend, which is still in progress now. It is also interesting to note that there are plenty of banking stocks across mainland Europe exhibiting similar downtrends, the bulk of which started well before anyone had mentioned "Cyprus". Another case of price preceding news???

The moral here for anyone trading trends is that you need to focus on what the chart is telling you as objectively as possible, not what you want it to show you. Following that basic rule, and applying a simple trend following strategy, you would have made profits on both the long and short side in a matter of three or four months.

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