The method of trend following goes against the old Wall St. Philosophy of buy low and sell high. It takes benefit of the market whether the current trend is up or down. Traders using the trend following technique begin trading after a trend is already established. Other traders attempt to envision what the market will do, trend followers wait for the market to do it. The size of the trading account and the volatility of the issue are the primary determining factors in how much to invest.
The systems that monitor trend following are pre programmed to exit if there’s a surprising downward turn to the trend. The trader will wait and re-enter if the trend re-establishes itself. The point of trend following is to follow the trend after it is established.
For a trend follower, its all about price. Although other factors may be considered, price is all crucial. The quantity of the investment is determined primarily by the price of the issue. The timing isn’t as critical as the price . Before commencing a trade, the trend supporter will have planned his exit technique. The timing for getting out whether the trade is a winner or a loser is more significant than the the timing for the buy. The software can be set at a destined stop loss point to avoid unsatisfactory losses.
Trend supporters use software to back test a trade that’s under consideration. They can then judge the technique based on the test. The software evaluates various aspects of the trade under consideration. The trader can study the results and finely tune his approach.
Trends are effected by events that can’t be foreseen. A problem in a upward trend can go down due to an event or can go up. Hurricane Katrina is an example of an event. As shortly it it became clear the hurricane would hit the town of New Orleans, gas costs rose. Trend supporters in the commodities and stock markets started investing heavily in oil which drove prices up farther. There has been some criticism of trend following, especially in the commodities market. Some critics believe that trend followers basically effect the market.
The stock exchange is a gamble, although if you understand how to play the market, you get much better odds than in Vegas. Trend following is one method that has proved successful for many investors, but it shouldn’t be a trader’s only strategy. By mixing trend following with other proved methods you will maximise your gains and minimize your losses. A diverse portfolio together with different techniques is the simplest way to beat the market.
I you don’t have a plan and the right information when you enter the market, you will almost surely lose money. Learn all you are able to and employ trend following with other proved techniques and you will make the best of your investment greenbacks.
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