Monday, October 21, 2013

All aboard the trend following express

A good analogy for a trend follower is to imagine you are a on a train journey.

The train may make some stops along the way, but if you jump off, thinking you've gone as far as the train is going to go, only to see the train depart without you, how gutted will you feel being left behind?

Similarly, if you want to trade in a particular direction, would you jump aboard a train travelling in the opposite direction in the hope your joining will turn it round? No, I didn't think so.

You most certainly do not want to step in front of a train as it steams towards you, showing no sign of stopping. Yet a lot of traders appear to want to do this, by trying to time an entry in the opposite direction.

Trend followers wait for the train to start travelling in the direction they want to go before climbing aboard.

If you think about a lot of the famous traders over the decades, the vast majority have used some form of trend analysis in their decision making.

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