An important rule that most trend traders miss
If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.
Bernard Baruch
I receive the question regularly: How do you pinpoint or find a trend? First, put away the microscope — it will not help locate trends. Some people seem to think there must be some one precise way to determine when a trend starts. Identifying the exact trend starting point is their single unreachable objective. It’s the same as picking a top or bottom. If you find yourself attempting to peg the exact beginning of a trend — get ready to start losing money. The holy grail of “finding a trend” can’t be had. You can never know the true impact of a trend until it is over.
What can you do then? What do trend followers do? First, you must have a trading system that covers all issues including money management (or bet sizing). A complete trend trading system will establish rules for entry, exit, how much to buy and how much to sell and all of your core rules. Regardless of the particular day, week, month, year or current market condition, the rules are universal.
But, still people ask, “how do you determine a trending market?” Wrong question! The question is how do you make money. The answer involves taking small bets early on in a market (that is starting to move or trend) to see if the move indeed matures and gets to that big trend. Trend followers enter markets long before the nightly news is reporting new 13 year highs and long before a monster trend is ever evident to the masses. When the financial news starts talking about high oil prices or a stock at record lows or highs, trend followers have long since established their positions (and profits) and may be exiting when the late to the party amateurs start taking their positions.
Think about it this way. When trends begin they often arise from a flat market that doesn’t appear to be trending in any direction. That’s when trend followers are establishing their positions based on their entry rules. There are usually small signs early that signal trend follower’s entry into a market. These signs, coupled with money management, are all you can consider as a trader. But, on the other hand, if you want to keep thinking that there is a way to spot a trend…
Performance, Risk and Correlation Characteristics
Some of the best learning takes place from examining the marketing documents of the great traders. Consider a quote from a Graham Capital white paper and then the white paper itself:
“Trend Following has had positive returns over a 20 year period because trends occur in virtually all markets some of the time. Trend Followers create quantitative models to capture these long term trends while limiting the cost of doing so. These models create an expected return profile similar to being long options…”
Michael Rulle, Graham Capital
Download (PDF) white paper on Trend Following.
Fast and Frugal Decision-Making for Trading
Mark Rzepczynski, President & CIO, John W. Henry & Co. offered a great video presentation at NYMEX.
Click here for the video Seminar. This seminar is nearly 60 minutes long and requires Windows Media Player for PC or Mac to view on your computer.
Mark nails many of the core issues that you must ponder as a trend following trader. Can you make decisions like he describes?
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.