Sunday, December 14, 2014

Trend following is child's play!

Children have a wonderfully uncomplicated view of things. What they say and think is based on what they see, and as we grew older we tend to lose this skill. 

Trend following is a very simplistic method of trading. A good set of trading rules should be able to be written on the back of the proverbial cigarette packet, or on the reverse of a business card. If you can't then its too complicated.

I was forever getting in trouble at school when it came to homework or exams. The teachers wanted a minimum of say 500 words written discussing a topic. Typically I would write about 50 - less if possible. I boiled things down to the bare essentials - anything else was a waste of time and ink! 

If I could have got away with it, I'd have written a few buzzwords, some additional bullet points covering the key areas, and that would be it. The teachers would get frustrated at my marks, as they knew I knew what I was being taught. So my 'O' level results weren't as good as what they (or my parents) wanted or hoped. But it never really held me back.

Thinking about it, this is why trend following is such a good fit for me. I concentrate on the bare essential - price. Everything else is fluff.

Occasionally my young son will come up and watch what I'm doing. He wouldn't know anything about forecasts, analyst predictions, P/E ratios, oscillators, Cramer, divergence etc. But if I ask him what is happening on a chart, he will be able to tell me whether price is going up, down or sideways. And that is all trend following is designed to do.

"Pure price systems are close enough to the North Pole that any departure tends to bring you farther south." - William Eckhardt

Now, I know there will be plenty of people who will say "Nonsense - it's not that simple. You have to look at X, Y or Z". That's fine if you want to think like that.

But think about this: Crude Oil has fallen over the last few months from over $100 to below $60. There's plenty of reasons out there why it shouldn't. And as a result, people have either missed trading that big trend, or have continually been trying to pick the bottom, on the basis that the price move is unwarranted.

Trend followers, on the other hand, will have observed what price was telling them, and traded accordingly. They concentrated on the bare essential necessary which would help them make a profit. And that one trade has probably made their year.

"It often seems that trends create events more than events create trends. The event itself is usually a reflection of everyone 'getting it' as Ed Seykota says, 'an A-ha'. By this time, trend followers usually have well established positions." - Jason Russell

Once you know and understand how simply following price can work, trend following really can be like child's play.

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