We 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 can’t be had.
What can you do? What do trend followers do? First, you must have a system that covers all system trading issues including money management (or bet size). A complete trend trading system will establish rules for entry, exit, how much to buy and how much to sell. Regardless of the particular day, week, month, year or current market condition, the rules are universal.
But, still 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) to see if the trend does indeed mature and get big. Trend followers enter markets long before the nightly news is reporting new 13 year highs and long before a trend is ever evident. When the financial news starts talking about high gas 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 based on a David Faber news report.
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 the keys.
The Wrong Way to View a Trend
“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
It was reported that a trading fund had still not seen major redemption’s even though the fund was down 95%! Think about that. Your position is down 95% and you are still sitting there holding on hoping for it all to come back. This is a great example of following the trend the wrong way. And for those that think we are simply being 20/20 hindsight, you are dead wrong. Trends are trends and they will continue to behave the same in the future as they have in the past. You just need rules to trade them. More.
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