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Frank Kollar of FibTimer.com explains that because the overwhelming majority of trading profits comes from just a small percentage of trades, it’s critical that traders not be discouraged by losers, and that they take steps to limit losses and let winners run.

Trend traders depend on change to make their strategies work. Simply said, a market that just goes sideways cannot be timed. But a market that trends up and down can be.

History shows us the financial markets are usually in trends. You can go back hundreds of years; you can look at stock markets, commodity markets, Dutch Tulips, you name it, they are more often than not in trends.

History also shows us that trends usually last much longer than anyone expects.

For example, after a huge upward trend through most of the 1990s, the US stock markets were in a downtrend (bear market) from 2000 into early 2003. Any chart can easily show you the trends.

For the next several years, into 2007, the financial markets were in a solid uptrend. Then we again suffered through another downtrend, but Fibtimer subscribers made money instead of taking the 50% losses that most investors suffered.

Overall, financial markets are in defined trends about 80% of the time. This has been the case for many, many years.

Sideways Markets Are Actually Good News

But what about those sideways times, the times that try our patience and our will?

The good news is that sideways markets are always either the base or the top of a new trend. That means the next trend is around the corner when we are enduring a sideways market. We just have to make sure we are on board and profiting when it happens.

That is where trend trading comes in. We establish a set of rules that identifies when a trend has begun. If the trend fails, we exit. If it continues, we stay with the trend no matter how long it lasts; months…even years. After the trend fails, according to our pre-set rules, we exit.

Ever heard the saying, “Cut your losses short and let your winners run?”

Think about how powerful such a trading strategy is. You never miss a trend, either up or down. At tops and bottoms, you may get some small whipsaws as the market becomes volatile and false trends occur as the markets consolidate and decide which way the next trend will go.

If we encounter a whipsaw, it will result in either a minor loss or small gain because our money management rules, built into the strategy, do not allow losses to build. But that whipsaw is just the precursor to the next trend. In fact, they could be considered exciting times because we know that they are just setting up our next big trend and big profit.

NEXT: The 80/20 Rule and Its Impact on Traders

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