Saturday, May 04, 2013

Trends and King Canute

Back in this post in December, I talked about the lack of major trends in some of the world indices over the preceding couple of years. As I mentioned in that post, it is always worth keeping an eye of the charts in a longer timeframe than you use for determining your own positions.

The theory here is that, allowing for certain fluctuations and 'noise' (nothing ever goes up or down in a straight line) if you trade in the direction of the predominant trend, on a shorter time frame, then you will profit from taking 'chunks' of that major trend.

I've shown below the updated monthly candle charts that show clearly how, from a volatile non trending state, there are now some clear trends in some of these markets. Charts like these can help determine your directional bias.

A great example is the major move up in the Japanese Nikkei over the last few months.

Given the strength of some of the trends, it raises the question of why some traders feel the need to try and pick the tops of these moves and initiate short positions. They may argue its a good risk/reward trade, but I don't go along with that. I play when the odds are in my favour - i.e. I trade in the direction of the trend. Going against a major trend is the modern equivalent of King Canute trying in vain to hold back the tide!

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