Have the Markets Changed? Part 2
09/11/2015 6:00 am EST
As a follow-up to last week's article, Frank Kollar, of Fibtimer.com, offers the second part of his response to the question, "Have the markets changed?" In this section, Frank goes further into detail about the benefits of following trends, though he also warns traders about the one way the strategy can still fail.
Last week we began to answer the question asked us by many of our subscribers, "have the markets changed?"
Our answer was...no.
To read last week's Part 1 click here.
The markets have been unchanged for hundreds of years and there is no reason to believe they will not continue unchanged.
Prices must either go up, down, or sideways. One of these three outcomes will occur. Change is inevitable and has been the one thing that can be counted on in the markets throughout history.
No advances in technology, no leaps of modern science, no radical shifts in how we see the markets will ever alter this fact.
Thus, a market timer does not need to predict the future or even attempt to predict it. A timer only needs to know the rules of the game and abide by them. If the market goes up, be long. If the market goes down, be short or in cash.
Strategy Based on Change
Trend following—the basis of our timing strategies here at FibTimer—cannot fail over any fair time frame. Why? Because trend following uses the one thing guaranteed to occur in the markets to make its trading decisions...change.
Trend followers are always poised to jump on board the next unexpected major move in the markets and to profit from it.
A great trend following system adapts to and uses change. The future is its most important ally.
A good trend following strategy lets profitable positions continue, while quickly exiting positions that go against you.
However, there is one way a trend following strategy can fail.
A timing strategy that is not applied systematically, with discipline, in both good and bad times, is not a strategy.
A strategy that is exited during unprofitable or emotional times will not work over time, because you cannot know when the next profitable market move will begin.
Starting a timing strategy based on a solid track record of previous profitable results is fine. But if you cannot stick to the plan, the results we achieve over the years will not be the results achieved by you.
Our trend following trading strategies are based on the only constant the financial markets offer us. They are based on change. We make our profits when the markets change.
When the markets are tough, you need only to execute the timing strategy. Having the strategy gives us the ability to avoid making difficult decisions under pressure when we are most likely to make mistakes.
By trading trends we never miss a major trend. We only need to have faith in the system and trade it. When the inevitable next big move occurs, we are thus guaranteed to be profiting from it.
Change is inevitable and is the only market forecast we can count on. Trading trends profits from the big moves we know are in the future.
But trading trends requires that we make the trades, in good times and bad. We will never know ahead of time which buy or sell signal is the one that makes the big profits.
Lastly, a trend following timing strategy seldom enters or exits at the most favorable price in a market trend.
Instead, a strategy based on change seeks to close out losing positions quickly to preserve capital and to hold profitable positions for as long as the market trend continues to exist.
The change and volatility implicit in the markets work to your advantage. You won't make money without them.
Don't get caught up in the whys of the market.
Markets stay the same because they will always change. But as a trend follower, you don't care and you always know how to react to change.
By Frank Kollar, Editor, Fibtimer.com