Thursday, October 09, 2014

What to do next?


Is the uptrend now over? It seems that some people are now realising that the markets don't simply move in an upwards direction. 

Volatility is increasing. Patterns of lower highs and lower lows are beginning to form on some of the major indices. Critical support levels or keenly watched moving averages are being tested.

If you are not prepared for them, downtrends can be particularly painful and expensive. If you are not comfortable trading downtrends, you can move to cash. However, they can also present the astute trader with great opportunity.

A trend followers job is to follow the trends that the market produces, and trade in the same direction. nothing more, nothing less. Opinions and predictions are thrown out of the window. Price and its direction tells a trend follower everything he needs to know.

We are generally an unemotional bunch. If price on a stock or instrument is going up, we look to go long. If it is going down, we look to go short. If an existing trend finishes, we exit. If an old trend re-asserts itself, we can get back in. If a new trend starts in the opposite direction, we will open a new trade. Rinse and repeat. We never know if a new trend signal will be profitable or not. We simply react to what the market tells us, which as we know, is the sum total of what all market participants are buying or selling.

Depending on your personal timeframe, parameters etc., some traders will pick up a new trend earlier than others. Against this though, you can get whipsawed around if a longer term trend re-asserts itself. No problem. That's what good risk control and the use of stops is for.

Downtrends are where trend followers can often make significant profits - you only have to look back to 2008 to see that. They are content to let the trades play themselves out. No trying to pick the bottom of a move, or try and catch any falling knives.

No doubt there will be plenty of people out there using some economic or fundamental basis for saying the markets are oversold. To a trend follower, price simply shows us the way in which we should be looking to trade. Remember though, if you are not able or comfortable with shorting, then going to cash is your best bet at the moment. Why try and argue with the might of the market?

Read more here and here on trading downtrends.

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