Q. Is trend following obsolete because markets are different now?
A. Trends in financial markets have been strong for the last hundred years. But are markets different now? After researching that question at the National Agriculture Research Library in Maryland, TurtleTrader discovered that the number of trends in currencies, bonds, grains and stocks in the 1800’s were approximately the same as the number today. Moreover, the trends have always been random and unpredictable. That’s why the key to trend following will always be reaction to market movement, not prediction.
Q. Why is trend following successful?
A. Trend following is a measure of market psychology. Trends, like epidemics, build in geometric progressions. Some people jump on the bandwagon; some get in early either by chance or luck; others get inside information about the fundamentals. Finally there is a critical mass that makes it possible for even more people to simply hear about the trend and get on board. If you design a strategy to take advantage of this basic human behavior, you can apply the psychology to a broad range of markets; from cotton, to currencies, to stocks, and win. This is the key to trend following.
To be successful in the trading game, find a sound strategy and then learn and understand the rules of your strategy. Most investors don’t want to work that hard. They don’t want to know how trend following turns their mindless approach to trading upside down. It can be hard to change old ways or learn new methods, but it’s worse to continue losing money with no strategy at all. However, if you learn trend following, you will wonder why you ever listened to a broker’s tip or watched TV waiting to hear the next big trade.
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