Trend Trading Golden Rule : Many investors at one time or another have heard of trend trading but most don’t really know what it means or how to get started. In the great words of Wikipedia, “Trend-following is an investment strategy that takes advantage of long-term moves that seem to play out in various markets” but isn’t that what most long-term investors strive for?
What Exactly Makes an Investment Strategy a Trend Trading Strategy?
By definition, when you are a trend trader, you follow a trading system and you stick with it for as long as your system requires. It’s quite simple, really: you create or invent a system that you believe will work over a long period of time. You get to the point of trusting the system because you, or whoever has built the system, test and retest the numbers until you reach a point where you can be sure that your system will make money. The most important thing is to stick with that system no matter what. Easy to summarize, but a bit difficult to execute.
Don’t get me wrong, trend trading is not rocket science. This is a proven investment strategy that has generated billions of dollars over the decades. It uses various indicators to determine the trend of the market and profit from both sides of that market, enjoying the advantages of the ups and downs of the market. This up and down movement, volatility, is what makes a trade successful, not how well the market performs on a given day.
We all have ideas in mind when we hear the word “trend”, but for investing, it is more than just what is “hot” at any given time like Fall Fashion or video games right now. It’s more about sticking with your system and the trend, because it’s about seeing the trend.
It’s about finding a system you trust, sticking with that system no matter what until you break the trend, and you can make profits similar to world-class hedge funds. For example, Warren Buffett is a very famous trend trader and it is not uncommon for large funds to generate over 1000% profits. Is it right.
Decade of Proven Profits
Trend following has been firmly documented since the 1950s when Richard Donchian published the trend following newsletter which became very popular and became popular again when the book Market Wizards: Interviews with Top Traders (written by Jack D. Schwager) came out.
One of the most famous stories ever circulated among merchants is documented in this book and it is about “The Turtles.” Many trend traders that are known today are associated with the Turtles or try to emulate them.
The story of Turtles is actually very similar to “My Fair Lady” where a professor gathers a rich man so he can take a lower class woman, put some nice clothes on her and teach her to speak properly and use proper diction, and she will graduate as a woman. high class. The rich man was shocked by this and declared it could not be done. Needless to say, it was doable and Audrey Hepburn married the professor.
So in the case of “The Turtles”, two respected (read: successful) traders argue about learning to trade. One trader said great traders are born and not made, while another, Richard Dennis, said people can learn how to trade and do it well.
So they made a bet – for $1.00. Then they gathered a small group of 14 people, 12 men and 2 women – most of whom had never traded before – and taught them a simple trading system. They give them training for 2 weeks, then give them money to trade.
Four years later, the tortoise made more than $200 million. Richard Dennis, the trader who says trading can be learned, wins the bet. He is one of the most famous trend followers of today.
Trend trading can be taught, can be learned, and can make a lot of money.
The amazing thing is that the real rules of any trend trading system are easy to learn. This is not rocket science. The hard part is following your system consistently. That means being patient, diligent and not getting emotional with your trades. It’s not even that difficult. And it’s much easier to follow the system when you know you’re doing the right things, in the right order, at the right time.
So the summary of trend trading is, if you want to make money trading, you need a system that makes money, and you need to know that you can be taught how to use that system. There are no secret techniques or hidden tricks dollar lion now and so can you.
How Much Do I Buy and Sell to get this Return?
Exactly how much to buy or sell is based on the trading account size and market volatility. Adverse price movements signal an exit for the trade. Traders usually enter trades after the trend has established itself, and, for this reason, they ignore the initial market turning points.
If any market changes against the trend, the system has a programmed exit every time. This is something to especially look for in a good system. The system then waits for the turn to establish itself as trending in the opposite direction. If the system gives an exit signal, the trader re-enters as the trend re-establishes. Your system allows you to “avoid the trend.”
What about Volatility?
Volatility, up and down movement in the market, this is what makes you money. Trend Traders use calculations of current market prices, moving averages, and channel breaks to determine the general direction of the market and to generate trading signals. Traders who use trend-following strategies do not aim to forecast or predict specific price levels; they just follow the trend and ride it.
And Don’t Forget Risk Management
Trend following is most often associated with technical traders and involves a risk management component that uses three elements:
1. the number of shares owned,
2. the current market price,
3. current market volatility.
The most important thing you want to remember about risk management is that you only want to trade 1-2% of your account with each trade. This keeps your losses to a minimum, as there will be losses as is the case with any type of investment strategy, but you don’t risk losing your entire account with any trade. I have seen traders wipe out their entire accounts in daily trend trading which is done properly to avoid this risk.
The initial risk rule determines the size of the position at the time of entry. Exactly how much to buy or sell is based on the size of the trading account and the volatility of the issue. Price changes can lead to a gradual reduction or increase in the initial trade. On the other hand, an adverse price movement can cause an exit for the entire trade.
A good Trend Following System tells you:
• How and when to enter the market.
• How many contracts or shares to trade at any time.
• How much money is at stake on each trade.
• How to exit a trade if it becomes unprofitable.
• How to exit a trade if it becomes profitable.
Whether you build your own system or buy one, these are the things you need to know to make your trades. You should also have access to sufficiently backtested data to verify system profitability claims. And remember, keep your trades small. Trend trading is a great way to make a lot of money. The most money is in the Futures Market, but you can apply trend trading strategies to stocks, currencies, practically anything. The profit potential is out there.