Trend Following

  • Profit in up and down markets: Trend following doesn’t swear an allegiance to a bull or bear market. It follows trends to the end. No matter how ridiculous trends might appear early and no matter how insanely extended they might appear at the end, follow trends. Why? They always go farther than anyone expects. Ignore momentum at your peril.
  • No more buy and hold, analysts, or news: Trend following decision-making doesn’t involve discretion, guesses, gut feelings, or hunches. It’s not day trading or buy and hope. It doesn’t involve passive indexing, in and out trading, or fundamental analysis. No more 24-hour news cycles, daily turbulence, or sensational hype. No black boxes or magic formulas either. Let go of the Holy Grails.
  • No Prediction: Trends exist everywhere, always coming and always going. Markets are no different: They trend up and down. That said, no one can predict a market trend , you can only react to one. Trend following never anticipates the beginning or end of a trend. It only acts when the trend changes. There is no need to figure out why a market is trending, just follow it. You don’t need to understand electricity to use it.
  • The big money of letting profits run: Trend following at it’s best aims to compound absolute returns. It doesn’t shoot for average. The goal is to make the knock your socks off return, not passbook savings interest. Trend following also has the unique ability to lie and wait for targets of opportunity. That means killing it on unpredictable surprises.
  • Risk management is top priority: Trend following always has identified 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.
  • Takes advantage of mass psychology: Trend following takes advantage of panicky sheep behavior. Strict discipline minimizes behavioral biases. It solves the eagerness to realize gains and reluctance to crystallize losses. Too many people believe what pleases them. Most behaviors are simply driven by the impulsive moment of now. Trend following wins because of that.
  •   Scientific approach to trading: Trend following doesn’t require a belief, but rather it relies on unwavering scientific principles. It has defined edge just like the MIT card-counting team that beat Vegas casinos. Be the casino, not the hapless player. Trend following uses rigid rules rooted in numbers. Think process not outcome. Remember, frequency of correctness is not the issue, the magnitude of correctness matters. Winning percentage means zilch.
  • Strong historical performance in crisis periods: Trend following is adaptable to differing climates and environments performing best during periods of rising volatility and uncertainty. The unknown will happen again. Are you ready? You have to be able to ride the bucking bronco. Ride the storm out and stay alive.
  • No traditional diversification: Trend following is not restricted to any single market or instrument. A focus on price action follows trend following to be applied to an exceptionally large variety of markets. Price is the one thing that all markets have in common. A trend trading system for treasury bonds should also work on the Euro and stocks. Trend following is robust.
  • No government reliance: Forget Social Security, bailouts, stimulus plans, and roads to nowhere. Those won’t help you to make money; they only help you lose. When the Fed puts on or takes off the training wheels, will you be ready to mint cash or will you sit there and just take it again? If you portfolio is grounded is sound principles you can win no matter what happens.