Activist investing continues to gain advocates — and capital; according to Hedge Fund Research...
The Ultimate Trading Indicator
09/08/2011 9:00 am EST
It's everywhere, in front of our faces constantly, and you can't escape it...but you can trade off of it.
While the trading world has always been subject to innumerable uncertainties, it seems that in recent years this is even more the case. On any given day, there are so many potential news events that could change market direction that it is impossible to keep track of them all.
The world has emergencies just waiting to boil over all the time. How can we, as trend traders, stay one step ahead of the financial markets? Markets which are assimilating and reacting to all these events constantly—and more importantly, instantly?
Over the years, trend timers (trend traders) have consistently generated excellent returns in the markets because they make their trading (market timing) decisions based on a core piece of information.
Although there are innumerable indicators measuring everything from sentiment to volume, every one of them is subject to interpretations that can result in incorrect decisions. For example, MACD crossovers can give two correct signals in a row, but then be wrong several times.
What seems perfect for a while is not so perfect when watched over time. This is true of all the indicators most technicians follow.
Fundamental analysis can identify the perfect stock or market sector, but of what use is it if that stock or sector declines even while the fundamentals look superb?
But there is one indicator, one core piece of information, that is always up to date and always correct. That piece of information is price, and particularly the closing price at the end of every trading day. All the news, inside information, and economic and fundamental data available is reflected in that closing price.
Price is the ultimate indicator. Seem too simple? Read on...
The Combined Thoughts of Millions of Investors
In prior commentaries I have described price as, "...the perfect reflection of the combined thoughts, analysis, indeed the intelligence, of millions of investors."
No matter what is occurring in this world that could conceivably affect the markets, it is "already reflected" in the current price. Whether you are looking at commodities, stocks, currencies, or any freely traded market for that matter, the current price reflects all the news, all the time.
Market investors and traders are constantly bombarded with a huge array of statistical information, indicators, fundamental data, economic studies, news releases, plus the tug of war created by our own emotions.
There is enough information out there to make your eyes glaze over. But none of them tell you when to buy or sell.
All You Need to Know
The very idea that price offers all you need to know, that it tells you when to enter and exit "any" freely traded market, flies in the face of many analysts who have spent their lives studying these markets. How could something a simple as price be all that we need?
Let's look at some simple examples:
Let's say that XYZ stock has gone from $10 all the way to $100. When that stock was at $10, did anyone know it was going to $100? It is likely that no one knew, but trend traders using price to determine when to buy the stock would have been buyers all the way up...because as price increased, they bought.
If you had a chance to buy the same stock at $25 a share, would you have taken it? Probably not. The stock was up 150% at that point. Most investors would wait for a pullback to buy it.
But not trend traders. The trend is up, you go with the trend. "Price" has dictated the direction of this trade in unmistakable terms. It was a buy at $15, $25, even a buy at $80.|pagebreak|
When Nortel (NT) was at $80 a share in 2000 and dropped to $70 a share, the vast majority held onto this blue-chip stock, and many bought more shares at this new bargain price. In fact, people were buying at $60, $40, $20, $10.
They all lost money. Huge amounts of money. Were they buying when it was under $1 a share? Probably.
But trend traders were taking short (bearish) positions, because the "trend," based on changes in "price," was down. It made no difference what the analysts said, or what the prevailing sentiment was. The price was declining, so the trend was down.
When Nortel was trading at less than 50 cents a share only two years later, trend traders were buying their own private islands, but those who bought Nortel for the long haul had lost their entire investment except for just a fraction. This included huge investment firms, pensions, money managers, etc.
Had they even considered trend changes in price in their intricate trading plans, it would never have happened.
Trend Traders Never Fix a Profit Target
In the above examples, would you have taken profits at some point?
Trend traders never fix a profit target. They realize that there is no way to know ahead of time when a trend will end, so they stay with the trend all the way. When it ends and reverses, "then" they exit the trade.
If you bought the above XYZ stock at $20 and took profits at $30, you would have a nice 50% gain, but would have missed the 400% total gain of the entire trend. However, if you had exited your bearish position in Nortel at $60, or at $50, you would have missed the huge profits still to come.
No one, not even trend traders, knew that Nortel would reach less than 50 cents a share. But those who trade trends, and allow price to dictate when to exit a position, held the bearish position for huge gains. At the least, those who exited to cash did not lose their capital.
No one knows when a trend will end. Only price tells us.
Trend traders seldom get in at the exact bottom, nor exit at the exact top, but they do profit from the majority move of every trend, and they have clear buy and sell signals. All generated by that one simple piece of information, price.
Trend traders do not believe that anyone can consistently pick tops or bottoms. They do not believe that reversals can be consistently traded either. Sometimes people get lucky, and sometimes they do not.
But if you trade trends, luck is not needed. You have price to tell you when to enter and when to exit.
Trend traders who use price to determine trends have been quietly beating the markets for many years. They will quietly continue to do so for many more.
FibTimer identifies and trades trends. We never miss any trend because we trade them all―emotionless, non-discretionary, and profitable.
Frank Kollar can be found at FibTimer.com.
Related Articles on STRATEGIES
While the Dow has not stayed on the balance line we’ve discussed in recent updates, last Frida...
We must apply a high degree of logic in our daily lives to survive and prosper. Yet, in trading, the...
This week is about inflation, inflation and inflation! Today, the US CPI (Consumer Price Inflation) ...