One of the most persistent instincts working against trend following is the refusal to buy at all-time highs. A stock or market making new highs feels expensive, risky, and late. The instinct says wait for a pullback, wait for a discount, wait for a safer entry. That instinct is wrong, and the research behind it is well documented. Trend following is built precisely on the willingness to buy strength, including at all-time highs, because price making new highs is one of the strongest signals available that a trend has genuine momentum behind it.
Thomas A. Vician Jr. recently provided us with a new white paper entitled Why Can’t Most People Buy the All Time High? (PDF).
For more information on Thomas Vician please visit Choice Alternative Investments. Thomas is also a student of Ed Seykota’s.
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Why Buying the High Feels Wrong
The reluctance to buy at all-time highs is one of the clearest expressions of loss aversion in markets. A price at a new high has no safety net of prior buyers below it. Every holder of the position is currently at a profit, which means any reversal produces immediate losses for latecomers. That psychological exposure feels riskier than buying a stock that has already fallen 30%, where the narrative says “it’s already been punished, the risk is lower.”
But the narrative is wrong. A stock down 30% from its high is not safer. It is in a downtrend. A stock making new all-time highs is in an uptrend. Trend following buys the latter and avoids or shorts the former. The breakout to a new high is not a sign that the trade is late. It is the signal that the trend has the institutional support and momentum required to continue. For the specific rules that define exactly how and when to enter on a breakout, see the TurtleTrader rules.
Ed Seykota’s Influence
Vician’s connection to Ed Seykota is relevant context. Seykota is one of the founding figures of systematic trend following, having built one of the first computerized trading systems in the early 1970s and generated returns that remain among the most impressive in the history of the approach. His influence on the generation of traders who followed him runs directly through the psychological and systematic principles that underpin the buy-the-high philosophy: follow the trend, cut losses, let winners run, and never let the discomfort of buying at a high price override the evidence that the market is providing.
Frequently Asked Questions
Why do trend followers buy at all-time highs?
Because a price making new all-time highs is one of the strongest signals of genuine trend momentum. Every prior holder is at a profit, meaning there is no overhead resistance from trapped buyers. The trend has demonstrated the kind of sustained strength that characterizes the large moves trend following is designed to capture. Waiting for a pullback to enter means waiting for evidence that the trend is weakening before getting in.
Why does buying the high feel psychologically difficult?
Because of loss aversion and the instinct to seek discounts. A price at a new high feels expensive and exposed. A price that has already fallen feels safer because it appears to have been “punished” by the market. In reality the fallen price is in a downtrend and the high price is in an uptrend. Trend following acts on the evidence of price rather than the psychological comfort of buying something that feels cheap.
Who is Thomas Vician and why does his research matter?
Thomas A. Vician Jr. is a trend following practitioner and a student of Ed Seykota. His white paper on why most people cannot bring themselves to buy at all-time highs addresses one of the most common behavioral obstacles to systematic trend following. His work at Choice Alternative Investments applies these principles in practice.
Trend Following Systems
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