The Forever Strategy
12/01/2014 6:00 am EST
For the benefit of newbie traders or for any trader who feels a refresher is overdue, Frank Kollar of Fibtimer.com explains why it’s so important, as a market timer, to stand firm during periods of volatility and always adhere to the rules of a highly disciplined trading plan.
As trend timers, we would not have developed our timing strategies without first researching not only the strategies, but the history of the financial markets.
What we found was that market trends are much more pervasive than most would think. In fact, trends could have been traded just as profitably 200 years ago, as they are today.
Looking back at price data for 100 and 200 years, the very same trending markets existed. They endured short times of sideways (non-trending) movement—just as they do today—and long periods of strong advancing and declining trends. Yesterday, just as today, trading trends would be profitable.
There are several important guidelines to successful trend timing that become easily apparent. Again, whether used 200 years ago or today, they are just as important. And they will be just as important tomorrow, ten years from now, or any time in the future, as long as free markets are traded.
Highly Disciplined Trading Plans
Successful trend timing strategies use highly disciplined trading plans.
In the short-term, the markets are run by the majority who are reacting to the emotions of fear and greed. It is ‘comforting’ to be moving along with the crowd. That is why the majority do it. But it is not profitable.
The ‘majority’ do not profit.
But the consistently profitable market timer maintains discipline and that means not only deciding to follow a solid timing strategy, but also trading it through thick and thin.
With a tested strategy, you can trade without fear. You do not need a crystal ball. A good timing strategy works across a variety of market conditions. It may not win on any single trade, but its methods give those who follow it that all important trading ‘edge.’
Executing a trading plan using unemotional buy and sell signals, designed to capture the majority move of all major trends whether up or down, removes destructive emotions from the equation.
"...by sticking to a trading plan that never misses a trend, you will profit over time."
A market timer may feel the pressure to disobey the plan. He may be swayed by advice from friends, current events, or the extremely powerful emotions of fear and/or greed. But by sticking to a trading plan that never misses a major trend, you will profit over time.
If a trend fails, the trading plan will quickly reverse. If the trend becomes a long-term, highly profitable one, the plan keeps you fully invested and does not allow you to exit in times of emotional corrections when the crowd is exiting in droves.
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Ignoring Short-Term Volatility
Successful trend timing strategies ignore short-term volatility in the attempt to realize superior profits during major trending markets.
Trends can last months and even years. During those profitable trends there will be corrections to the trend. Exiting at every correction leaves a trend timer on the outside looking in. Reacting to counter trend corrections usually results in losses. This is why it’s important to stand steady during such corrections.
There is an almost overwhelming desire to act in the face of an adverse market move.
Often it is labeled ‘avoiding volatility’ with the assumption being that volatility is bad.
But avoiding volatility often inhibits the ability to stay with the current long-term trend. The desire to have close stops and to preserve open trade profits has enormous costs over time.
Long-term timing strategies do not avoid volatility. They patiently sit though it. This reduces the chances of being forced out of a position in the middle of a long-term move.
Finally, a successful trend timing strategy never allows losses to accumulate. Trend timers are protected from large losses by their strategy, which never allows a failed trend to hurt capital. Trendless and/or volatile markets are inevitable. But a good timing strategy protects capital.
"Trend timers believe the markets are smarter than any of us. Successful trend timers identify trends, and patiently allow them to play out."
You cannot avoid the occasional failed trend and you cannot avoid the occasional trendless market. But a good timing strategy will not allow losses to accumulate. Capital is kept intact so when the next profitable trend begins, we are ready to jump on board and ride it to the end.
Trend timers do not try to anticipate reversals or breakouts. They respond to them.
Trend timers are not prognosticators. We just identify and follow trends.
Trend timers believe the markets are smarter than any of us. We make it our business not to try to figure out why the markets are going up or down or even where they are going to stop.
Successful trend timers identify trends and patiently allow them to play out.
We will now make a prediction, even though we say predictions are a fools game. This is a prediction (we predict) that will stand the test of time.
Prediction: Stocks will never go up forever because trends always reverse themselves. Stocks will never go down forever because trends eventually reverse themselves.
By Frank Kollar, Editor, Fibtimer.com