EVERY TRADER NEEDS A TREND TO MAKE MONEY
IF YOU THINK ABOUT IT, NO MATTER WHAT THE TECHNIQUE, IF THERE IS NO TREND AFTER YOU BUY, THEN YOU WILL NOT BE ABLE TO SELL AT HIGHER PRICES.
Trend following trading is completely different that what most investors are accustomed to which is a buy and hold strategy. Trend followers wait for a trend to begin before they enter the market and once the trend has shown signs of deterioration trend followers are exiting the market. Trend trading takes discipline and emotional control to stick with the strategy through the inevitable market ups and downs. It seeks to capture the majority of a market trend, up or down, for profit even if that means experiencing uncomfortable market volatility.
One of the great trend followers or our time, John Henry explains this best:
John Henry explains this best:
“THERE IS AN OVERWHELMING DESIRE TO ACT IN THE FACE OF ADVERSE MARKET MOVES. USUALLY IT IS TERMED ‘AVOIDING VOLATILITY’ WITH THE ASSUMPTION THAT VOLATILITY IS BAD. HOWEVER, I FOUND AVOIDING VOLATILITY REALLY INHIBITS THE ABILITY TO STAY WITH THE LONG-TERM TREND. THE DESIRE TO HAVE CLOSE STOPS TO PRESERVE OPEN TRADE EQUITY HAS TREMENDOUS COSTS OVER DECADES. LONG-TERM SYSTEMS DO NOT AVOID VOLATILITY, THEY PATIENTLY SIT THROUGH IT. THIS REDUCES THE OCCURRENCE OF BEING FORCED OUT OF A POSITION THAT IS IN THE MIDDLE OF A LONG-TERM MAJOR MOVE.”
Trend trading is best seen as reactive and systematic by nature. It does not forecast or predict markets.
“I DON’T BELIEVE THAT I AM THE ONLY PERSON WHO CANNOT PREDICT FUTURE PRICES. NO ONE CAN CONSISTENTLY PREDICT ANYTHING, ESPECIALLY INVESTORS. PRICES, NOT INVESTORS, PREDICT THE FUTURE. DESPITE THIS, INVESTORS HOPE OR BELIEVE THAT THEY CAN PREDICT THE FUTURE, OR SOMEONE ELSE CAN. A LOT OF THEM LOOK TO YOU TO PREDICT WHAT THE NEXT MACROECONOMIC CYCLE WILL BE. WE RELY ON THE FACT THAT OTHER INVESTORS ARE CONVINCED THAT THEY CAN PREDICT THE FUTURE, AND I BELIEVE THAT’S WHERE OUR PROFITS COME FROM. I BELIEVE IT’S THAT SIMPLE.” JOHN HENRY
TREND FOLLOWING ALWAYS INVOLVES A PLAN.
It requires that you have strong self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and current market volatility. Trend traders use an initial risk rule that determines your position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, a trend trader’s average profit per trade is significantly higher than the average loss per trade.
TOP REASONS FOR TREND FOLLOWING INVESTING
Risk Management is Top Priority:
Trend following always has defined exit protocols to control ‘injury’ to your account. Stop losses and proper leverage usage are standard practice. Trend following also has low to negative correlations with most other investment opportunities. It eliminates exposure to groupthink and toxic assets. Eliminating exposure is a winning move whereas hedging can actually increase your exposure. Trend following is the best protection for when bubbles pop and everyone starts running for cover.