Use this to catch a move to 10-year highs
Sugar is one of
those markets that can rocket on a whim.
Veteran traders will easily recall the years when markets like Sugar or Coffee
or Cocoa traded substantially higher or lower – the big trends out of nowhere.
Often sparked by an assortment of third world concerns, these markets have a
tendency to produce large trends in a short period of time.
Look at sugar now. It has exploded to recent
highs, highs not seen in more than a decade. But how could you have taken
advantage of a move like this? How could you have been ready for the next world
event to shoot sugar to the moon? You need to trade with rules. You need to have
a system. You need to be ready, with a market like sugar on your watch list,
ready to enter on breakouts as it is making new highs or lows. You have no idea
when you enter if it will go to the moon, but you still need to have a method
that will get you “in” to be on board so if it does rocket up – you don’t miss
it.
Take a look at the sugar trend for the last year:
This Sugar move is even more proof of the theorem
that trend following exploits “worldwide events”. Trend followers had ample time
to position in Sugar while it was trading around 8.00 – long before the market
blew through 12, 14 or even 18. What technical signal would not have had you
squarely into the Sugar trend?
Trend following entry into the Sugar happened
long before Brazil began using sugar to make mass quantities of Ethanol. You can
argue that the fundamental reason for Sugar’s rally is tied to Crude Oil. Brazil
wants energy independence, so it began using Sugar to make Ethanol in the fall
of 2005. However, the fundamentals didn’t matter if you were trading to take
advantage of this incredible move. Sugar began moving higher long before the
public knew about Brazil’s energy policy. Traders who waited on the fundamentals
to “explain” the rationale for the Sugar trade missed the initial breakout, and
the big profits that resulted.
Why do people have such a hard time just
accepting the sugar trend (or any other trend) and just riding it? Why do people
feel the need to explain “why” the move happened? One of my readers summed it up
nicely:
“I believe that most people prefer to think
that a ‘business approach to investing’ just makes sense – plain and simple.
Though if you bring the discussion further, and really delve into what that
means, and specifically, how it’s reliant upon prediction, then you get a lot of
blank stares. People have told me that they might not know the ins and outs of
how their money manager is making decisions, but they know he is using ‘sound
investment principals’ and they feel safe with that. When I bring up price being
the real-time determinant of value, when I bring up money management and
systematic trading decisions, as a clear way to be actively involved in your
chance of turning your nest egg into an eagle, I get a lot of negative
responses. The feedback I get is that people want to think that you need to be a
hard working detective to really dissect these companies, understand the
businesses, know the management, read the economy and then make an investment
based on these ‘facts’. They really would rather have that, and pay for that,
and buy into that – then work on themselves and take responsibility. I certainly
don’t think everyone is that way, but it seems that the majority is.”
Where do you fit in the spectrum? Did you need to
know why Sugar trended to trade it? Or were you agnostic to the fundamentals and
happy to follow the trend?
Michael W. Covel is the founder and
President of Trend
Following. A researcher of the most successful Trend Following investment
managers, he has been in the alternative investments industry consulting on
Trend Following to individual traders, hedge funds and banks for ten years. His
best selling book,
Trend Following: How Great Traders Make Millions in Up or Down Markets, New
Expanded Edition (Prentice Hall, November 2005) is a complete and concise
guide to trend following. It includes interviews with great trend followers who
have won millions if not billions in the market. The trading world has embraced
the book with endorsements from Van K. Tharp, John Mauldin, Ed Seykota and many
more. Trend Following is now in its fifth printing, and is currently available
in a Japanese translation with Chinese, German, French, Korean and Russian
translations soon to follow. Teaching and sharing unique insights about Trend
Following trading and alternative investments has earned Mr. Covel respect as a
rational and logical voice in uncertain times. Mr. Covel also writes for
numerous industry publications including Your Trading Edge, Stocks, Futures and
Options Magazine and International Petroleum Finance and is consistently quoted
and interviewed by a variety of financial publications.
Mr. Covel is also Managing Editor at
TurtleTrader.com, the
leading Trend Following news and commentary resource since 1996. Thousands of
visitors from more than 70 countries as well as hundreds of trading
professionals engaged in years of debate and interchange making the site the
rich archive of trading information, data and opinion that it continues to be
today. TurtleTrader, one of the largest & strongest trading community on the web
with over 7.5 million unique visitors since its inception, also functions as a
resource center for the Trend Following Educational Course.
Justin Vandergrift is with Chadwick
Investments. He can be reached at
www.chdwk.com.