Trend Following also called Momentum Trading
Trend Following also called Momentum Trading
October 12, 2005 in Stocks and Stock Options
Trend Following also called Momentum Trading
The Philosophy of Trend Following
Many successful investors fall into a group called "trend followers". I will try to explain what trend following is all about and why investors should be interested in using these general princiýples in their investing activities.
The first part is "trend." Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices. You will take a loss on the trade. There must be a trend up after you buy in order to sell at higher prices. On the other hand, if you sell first then there must be a following trend down for you to buy back at lower prices.
"Following" is the next part of the term. We use this word because trend followers always wait for the trend to move first, then "follow" it. If the market is in a down direction and then indicates a shift to the upside, the trend follower immediately buys that market. In doing so, the trader follows the trend.
"Let your profits run. Cut your losses short." This old trader's saying explains trend following perfectly. Trend-following indicaýtors tell the investor when the direction of a market has shifted from up to down or from down to up. Once in a trend, the trader sits back and enjoys the ride, as long as the trend keeps going in the trader's direction. This is "letting profits run."
If the market coopýerates, the trend follower would get into the trade as soon as the market passed his or her criteria for "trending" and would stay in it for the rest of his or her life.
Unfortunately, the trend usually ends at some point. As a result, when the direction shifts then the "cutting losses short" aspect of the axiom should come into play. The trader sensing that the direction of the market has shifted against the position, immeýdiately liquidates. If the position is ahead at that point, then the trader has made a profit. If, at the time, the position is behind, then the trader has aborted the trade, preventing a runaway loss. Either way the trader is out of a position that is currently going against him or her.
The Advantage of Trend Following:
The advantage of trend following is simple.... Please visit our website to access the rest of this article and more: http://www.stockadvisorgroup.com/InvestingStrategies/TrendFollowing.html
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