An Iconic Trading Strategy That Stinks

07/26/2012 10:57 am EST

Focus: STRATEGIES

Rob Booker

Author, Man Vs. Market: Lessons from Trading on the Road

History is filled with legendary "trend-following" traders, says Rob Booker, but today's trend traders are more versatile and profitable, and they can identify trends on many time frames.

The topic of trend following is getting more and more attention, and we're talking about that today with our guest, Rob Booker.  Rob, you've mentioned in the past that trend following is not necessarily as easy as a lot of people seem to think it is. What’s your thought on that?

When I hear the term trend following, I think of the Michael Covel books about the turtles, and about all this money that was supposedly made—gigantic sums of money—and these are the only successful traders in the world.  

I have seen people dedicate literally five, six, seven years of their life following the icons of trend trading, and they put these people on a pedestal that don’t talk about trading anymore, and that don’t even run money anymore. They talk about trend following as if it were the only way to do things, and they struggle and persist for years losing money attempting to make something of that.

These books are full of platitudes like never trade against the trend, but short on actual strategies for trading with the trend. So there’s a distinction between trend trading and trend following, I believe. 

Say a little bit more about that then. 

Well, I think a trend trader doesn’t really care about long term versus short term.  Doesn’t really care about five-minute charts versus ten-minute charts, or one-hour charts, or daily charts, or monthly charts.  A trend trader is going to look for a trend on any timeframe chart, and look for the recent movement that has occurred to persist and continue no matter what financial instrument it is, and no matter if it’s in a direction that’s countered to maybe the long-term direction. 

I’ll give you an example.  In recent news, at the time that we’re doing this recording right now, everybody’s just screaming and yelling about the Eurozone.  That Greece is going to fall into the bottomless pit of despair, that we’re all going to die, that the euro is going to blow up, and the euro has been falling. 

Well just recently on a Friday, a non-farm payroll report was released, and on the short-term charts a trend developed on the very short-term one-minute and five-minute charts.  A trend follower would obsess about the euro going down.  A trend trader could recognize that on a shorter-timeframe chart a different trend was emerging, and they could make some money trading the euro up.  In the midst of all this panic where everyone thought they’d be the craziest person in the world, there are many trends and micro trends occurring all across the spectrum in all kinds of financial products every day the market is open.

And it sounds like you’re really timeframe agnostic.

I’m a complete timeframe agnostic.  In fact, I’m probably going to be burned at the stake by the icons of trend following after this interview.  Exactly—I don’t care.  I don’t care if it’s the euro, if it’s gold, if it’s copper, if it’s feeder cattle.  I don’t care.  There’s always a trend that you could say you’re following on the big picture, but inside those shorter-timeframe charts there’s a rich universe of activity going in both directions all the time. 

Any tips for people who are watching this to help them learn to identify some of these trends? 

Well, I would say if you want to be a trend trader instead of a trend follower, who buys a bunch of books and talks about it like it’s the bible, here’s something that you can do. 

Look on those short-term charts, especially in the world of futures and forex for example.  Wait for an economic report—like an interest rate decision, an inflation report, or a non-farm payroll report—to be released, and watch as a micro trend emerges following the release of that report. 

Don’t trade before the report, but watch on these days when these reports are released, and watch as a micro trend emerges. Higher highs and higher lows, or lower highs and lower lows.  On the one-minute or the five-minute charts that most people would overlook, you can see wonderful four-hour-long trends occur on these shorter-timeframe charts that are easy to identify, and as long as you’re willing to trade in either direction, relatively easy to trade. 

Thank you so much, Rob.

It’s great to be here.

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