When It Comes To Trend, What Type Of Trader Are You?
Another fairly meaningless zig-zag session for the markets today. I don’t
know what direction we’re going tomorrow or the next day but I know what
I’m looking out for. A strong rally on big volume could help the bull case
and make the charts look a bit better. A break below the May lows would excite
the bears and could cause a steep selloff. While neither of these events would
be a guarantee for either the bulls or the bears, they might at least allow me
to formulate a bias. Right now it’s just wait and see. Stay tuned…
When it comes to trend investing there are different schools of thought with
regards to how long to wait before trying to capture a trend. Some traders prefer
to wait until the trend is well established before entering the market. The
advantage to this is that it helps prevent them from being whipsawed in and
out of positions in trendless or whippy markets. They can also take a bit more
leisurely approach to their trading since they will only be in the markets when
they are obviously trending. When the markets aren’t trending, it’s
just a matter of patience. The downside is that these traders will always be
late to enter a trend and will not be able to catch as much of the move. If
the trend is long lasting, they should still be able to catch a good portion
and take out some nice profits, but if the trend proves to be short-lived or
if they wait to long to enter, they may miss it completely.
The second group is those traders that look to jump on a trend as soon as it
appears to be emerging. This allows them to benefit from the outset and catch
the largest possible portion of the move. Should they be correct in their analysis,
these traders may be handsomely rewarded. The problem with this method is that
they are subject to being fooled by false moves. Should the apparent move turn
out to be a headfake, they will need to exit their position quickly to avoid
significant losses. If the trendless environment persists for an extended period
of time, they may be subject to multiple drawdowns.
^next^
So which group is right? Is it better to wait for an established trend, or
is it better to try and get in early? There is no right answer. It’s like
asking whether growth investing or value investing is better. Chocolate or vanilla?
Democrat or republican? Dog person or cat person? Boxers or briefs? You get
the point. What is important is that traders understand their preference. While
it’s ok to like both dogs and cats, that philosophy doesn’t translate
to trend investing.
Those who prefer to wait for an established trend must exercise patience. If
this is their philosophy, then nothing will be more frustrating to them than
getting in too early and getting burned. Jumping the gun is one mistake for
which they will have a very difficult time forgiving themselves. Consequently,
both their accounts and their confidence will suffer difficult blows.
Those who prefer to try and catch a trend at its outset must make sure they
are prepared at all times. The most frustrating thing for this group of traders
is missing the beginning of a move. Many times if they miss the beginning of
a move, they may have a difficult time entering later on. They may develop a
“deer in the headlights†look as the market moves in the direction
they were hoping without them aboard. Since these traders are subject to being
whipsawed more often, they must also make sure the risks they have been taking
are rewarded when the move is for real. The worst thing this type of trader
can do is get fooled multiple times and then miss the move when it actually
happens because they were either asleep at the wheel or afraid to pull the trigger.
So while this market tries to decide what it wants to do, make sure you’ve
already decided on your tactics. That way you won’t get burned flip-flopping
between approaches.
Best of luck with your trading,
Rob
robhanna@comcast.net