A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
The Trend Is Your Friend
04/28/2015 6:00 am EST
Frank Kollar, of Fibtimer.com, highlights a trend timing strategy—not of trying to figure out why the markets are going up or down or even where they are going to stop—of just identifying trends, trading them, and patiently allowing them to play out while profits potentially grow.
Over many years of research, we have found that no one can accurately predict the future of the markets consistently. They may do it once or twice (remember Robert Prechter of Elliott Wave fame in the 1980s?) but not over and over again.
Predicting presupposes you have the ability to see the future. Much like a fortune teller. Beware any service that tells you they can see the future. No one can. If they could, every trader in the world would be after their signals.
There are those who attempt to trade reversals. But first you have to wait for the reversal point to be reached, and then if you are incorrect, you take a loss, exit the trade, and await the next reversal point. Too much like fortune telling to us and really a system for short-term traders who are very nimble.
But there is a way of accurately being bullish during advancing markets and being bearish or in cash during declining markets.
Identifying and trading trends.
What are the requirements and advantages of trading trends? First you must have a trend established before you can trade it. It also means you must wait until after the trend ends before you can exit it. But most importantly, if you trade trends, you will never miss any bull market, nor be hurt by any bear market. Ever.
This is an incredibly important advantage. Imagine never missing a bull market and never being hurt during a bear market. Or even profiting during a bear market. And all you lose is a few points at either the top of the bottom.
We would not have developed our timing strategies at Fibtimer without first researching the history of the financial markets, as well as the potential of all of the various timing strategies used by market timers.
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.
"Successful trend timing strategies use highly disciplined trading plans."
Looking back at price data for 100 and 200 years, the very same trending markets existed. There were short times of sideways (non-trending) movement and long periods of strong advancing and declining trends. Yesterday, just as today, trading trends would be profitable.
There are several important guidelines to successfully trading trends. 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.
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.
NEXT PAGE: What About Short-Term Volatility?|pagebreak|
A market timer will undoubtedly feel 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 if you stay with a trading plan that never misses a trend, you will profit over time.
If a trend fails, the trading plan must quickly reverse. If the trend becomes a long-term highly profitable one, the plan must keep you fully invested and not allow you to exit during times of high emotion, when the crowd is exiting in droves.
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 countertrend corrections often results in small losses. This is why Fibtimer holds its position during such corrections.
"Successful timing strategies do not avoid volatility. Instead they depend on volatility to profit."
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.
Successful timing strategies do not avoid volatility. Instead they depend on volatility to profit.
Finally, a successful trend timing strategy never allows losses to accumulate. Trend timers are protected from large losses by their strategy. A good strategy never allows a failed trend to hurt capital. Trendless and/or volatile markets are inevitable and during trendless markets there may be some small losses. But a good timing strategy protects capital.
You cannot avoid the occasional failed trend and you cannot avoid the occasional trendless market. But if capital is kept intact, when the next profitable trend begins you 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, trade those trends, and patiently allow them to play out while their profits grow.
Predicting the markets is a fool's game. It is fun to do over cups of morning coffee, but if you want to beat the financial markets, you must identify and trade trends.
You must also stay with your trend trading strategy through thick and thin. If no one can consistently predict where the markets are going, they also do not know when the next trend will begin. Taking all trades guarantees that you will never miss it when it starts.
By Frank Kollar, Editor, Fibtimer.com
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