Wednesday, August 28, 2013

Trend following - sounds from the underground

As a method of making money, trend following seems to lack the glamour compared to say short-term, intra-day trading among those on social media or the web. Look at some of the more popular short term traders compared to those who are known trend followers - they have a much higher number of followers. And that's good.

Trend following is a bit of an underground movement. I'd say 90% of all market participants gravitate either to the short term, day trading style, or the longer term, more traditional style of buy and hold investing.

Trend followers are mentally wired slightly differently to the majority of market participants. For example:
  • We know we can come out ahead by losing more times than we win;
  • We discovered the virtues of applying a systematic approach, with no need for discretion in our entry and exit decisions;
  • We are not reliant on opening and closing a trade to the split-second, which may ultimately determine whether you make a profit or a loss;
  • We accept when a trade does not work out as anticipated, and are able to close the position for a small loss;
  • We do not need to know anything about a particular market, company or instrument to be able to make money - all we need to focus on is price and its movements.
The only discretionary decisions a trend follower makes is when constructing their rules and system parameters. These may include any of the following:
  • What markets to trade;
  • What timeframe do we follow;
  • What criteria do we use to determine an entry or exit signal;
  • What are our risk parameters.
Once those decisions have been taken, you are ready to go. Then it becomes a question of being able to follow those rules. This does not require a high level of intelligence or intellect - simply the ability and discipline to act upon the signals the system (which YOU created) give you.

Is it exciting? No. We don't trade for excitement. We trade to win.

We know that 90% of all traders tend to lose their money in the markets, yet where do the vast majority of these people try to participate? That's right, in the day trading arena - in those areas with all the volatility or market noise, and where split seconds can make all the difference between winning and losing.

Now, I do not doubt that some people can (and do) profit in those markets.

However, the majority either lose all their capital, or what profits they could make are swallowed up in either the spread or the commissions they are obliged to pay.

The majority of the remaining market participants go to the other extreme - the buy and hold brigade. Again, there are obviously people who do succeed doing this very well.

However, these people tend to hold positions based on some underlying fundamental belief in a company. It should be remembered that a great company does not necessarily means its also a great stock. They can also be in a losing position for months, if not years.

Is there a common denominator here? Yes there is.

In all these cases, those who succeed have found a method that suits their personality. Not everyone is suited to trend following. However, if you have failed in either the day trading or investing arenas, then consider trend following as an alternative. It may change your life.

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