Wednesday, June 05, 2013

Responsiveness to trend changes

Trend following systems will be configured to a traders' particular preferences, which mainly revolve around how responsive they want their system to be to price movement, along their preferred average holding period.

As with all things trading, there are pros and cons - generally the longer term the system, the wider the stop distance, and the slower they will respond to a reversal in price. this will mean that you encounter bigger erosions in open profits before an exit signal is generated. The shorter term the system, the more responsive it is, but at the same time you may be prone to more failed signals.

Some very good traders I know use more than one system covering different timeframes and responsiveness.

Only the trader concerned can make the decision as to how responsive they want their system to be. My own system is geared towards the shorter term end of the spectrum.

Someone using a short term trend following system may profit from a trend, however another trader using a longer term system may only get an entry signal right at the extreme point of the price movement.

It should be remembered though, that when a major trend does take off, all trend following system will hop aboard the trend at some point or another - it is only the timing that differs.

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