• Free Book
  • Store
    • Books
    • Free First Chapters
    • Free Newsletters
  • Recent Articles

TradingMarkets.com

Quantified Stock Market Trading Strategies & Systems

  • Home
  • New Trading Research
  • Education
    • Articles
      • Connors Research
      • ETFs
      • Options
      • Stocks
      • Volatility
    • Trading Lessons
    • Connors Research
    • Glossary
    • Interview Archive
    • Videos
  • Python
  • Quantamentals
    • Quantamentals: The Next Great Forefront of Trading and Investing
    • Quantamentals Resources
  • Courses
  • Store
    • New Book! The Alpha Formula
    • “Buy The Fear, Sell The Greed” – Best Seller!
    • Swing Trading College 2019
    • Trading Books and Guidebooks
    • Street Smarts
    • Online Trading Courses
    • Private Mentoring with Larry Connors
    • Customized Trading Research
    • Amibroker Strategy Add On Modules
You are here: Home / Stocks / Commentary / Trend Following: True Or False + 3 PowerRatings Stocks

Trend Following: True Or False + 3 PowerRatings Stocks

March 9, 2010 by David Goodboy

The concept of trend following is often one of the first strategies new traders learn when discovering the financial markets. Several well written and convincing mass market books preach strongly about the superiority of the trend following method.

On the surface it appears that nothing could be easier than catching a trend. The basic premise of trend following is that stock strength begets strength and stock weakness leads to more weakness. A series of higher highs and higher lows identifies an up trend. And a series of lower highs and lower lows is a sure sign of a downtrend.

The strategy, as defined in the books by the same name, teaches that once the investor identifies the trend, trades are placed in the direction of the trend. In other words, one would buy a stock that has exhibited an uptrend on the price chart. A stock downtrending would be shorted.

While this is definitely a feel good investing method and it appears to work for some large, well diversified hedge funds, trend following can spell disaster for the investor.

First, it is a non-quantified, unspecific trading system. For example, just how many up moves increase the odds that the next move will be in the same direction? My personal favorite example of why trend following makes little sense when examined is as follows. If you flip a coin and heads comes up 6 times in a row, are you in heads trend?

Secondly, when the trend following criteria is tested it fails miserably. We tested the S&P 500 over a 15 year period to determine if an edge actually exists going with the perceived trend. What was discovered is quite the opposite of what the proponents of trend following teach.

The SPY and NDX were used as the test vehicles. The market actually lost money within one week after 3 or more consecutive days of higher highs. The opposite was also proven true. 3, 4, and 5-days in a row of lower lows leads to outperformance over 1-day, 2-days and 1 week time frames. In fact, multiple day lows FAR outperformed multiple day highs.

Similar results were found when the Nasdaq 100 was tested. In other words, we clearly discovered that there is no edge whatsoever to trend following when trading stocks. Remember it’s often the ideas that make the least sense at first glance that are proven edge providers when investing.

Here are 3 top ranked PowerRatings stocks for your short term consideration:

Home Diagnostics ^HDIX^

Methode Electronics ^MEI^

MEI chart

^NR^

Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!

The Holy Grail of Indicators – Click here to learn the best trading indicator and why you should avoid the popular 14-period RSI.

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.

Filed Under: Commentary, Recent Tagged With: following trends, PowerRatings, Short Term Traders, stock strategies, Stock Strategies for Short Term Traders, trend following

Buy The Fear, Sell The Greed

Buy The Fear, Sell The Greed

Swing Trading College

New Book From Larry Connors and Chris Cain, CMT – "The Alpha Formula; High Powered Strategies to Beat The Market With Less Risk"

We’re excited to announce the release of a new investment book written by Larry Connors and Chris Cain, CMT. The book, “The Alpha Formula; High Powered Strategies to Beat The Market With Less Risk “ combines… Hedge fund legend Ray Dalio’s brilliant insight into combining uncorrelated strategies… With new, minimally correlated, quantified, systematic strategies to trade… [Read More]

Buy The Alpha Formula Now

Connors Research Traders Journal (Volume 57): 7 Real-World Reasons Why Short Strategies Should Be Included In Your Portfolio

In our new book, The Alpha Formula – High Powered Strategies to Beat the Market with Less Risk, we show the benefits of including short-strategies in your portfolio. As a reminder, building portfolios should be based on First Principles – otherwise known as truths. These truths are: Markets Go Up Market Go Down Markets Go… [Read More]

Company Info

The Connors Group, Inc.
185 Hudson St., Suite 2500
Jersey City, NJ 07311
www.cg3.com

About Us

About
Careers
Contact Us
Link To Us

Company Resources

Help
Privacy Policy
Return Policy
Terms & Conditions

Properties

TradingMarkets
Connors Research

Connect with TradingMarkets

Contact

info@cg3.com
973-494-7311 ext. 628

Free Book

Short Term Trading Strategies That Work

© Copyright 2020 The Connors Group, Inc.

Copyright © 2023 · News Pro Theme on Genesis Framework · WordPress · Log in