Friday, June 14, 2013

Trend following - the Marmite way to trade

Trend following is like Marmite - you either love it or hate it. Who on earth would trade in such a manner? Surely you need to know whether something is overbought or oversold, what the underlying fundamentals or earnings are, or...

Hang on a minute.

What is the only possible way in which you can make a profit on a trade?

If price moves above your entry price level on a long trade, or if price falls below your entry level on a short trade.

Remember the key word - PRICE.

Nothing to do with what Cramer is babbling on about. Nothing to do with earnings, or crop reports. It all revolves around price, and what it is doing.

To a trend follower, things like oscillators are simply used by people on the other side of our trades. Sure, they will win sometimes, but they will only catch small moves.

Trend followers go for absolute returns. They go for the big wins. That's why they profited in the bubble and the subsequent drop, in the 2008 market downtrend, and the subsequent uptrend in 2009-10.

That's why they profited in the early part of 2013, despite people repeatedly calling for a top in the market, or going on about megaphone formations, or the fiscal cliff, or Cyprus, or anything else for that matter. Let price show you the way...

Trend following is a completely different way of thinking about and acting in the markets. Allied to good risk control, a good trend following strategy will tell you when to buy a stock like Enron, when to exit and even when to go short. It's been proven time and time again.

Trend following and its performance is measurable. Emotion is taken out of it. You get an entry signal, you follow it. You get an exit signal, you follow it. The only discretion is in the rules and parameters you choose to use.

What's difficult about that? How on earth can that make money? Surely its too simple...

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