Trading Trends For
In the financial markets, a trend is generally understood
to be the current market direction. Markets can be trending
higher, trending lower, or trending sideways.
But defining a trend so that it can be profitably traded
is something else entirely.
Trends can obviously exist for one sector while another
is going in the opposite direction, or no direction at
all, and they can last for different periods of time.
Just saying that a trend consists of "rising" prices,
or "declining" prices is not enough. Every day is different.
A trend must be clearly defined in order to be profitably
And what about time frame? Are we talking about a trend
on a 5-minute bar chart where it could last an hour? Or
is it of longer duration: days, weeks, or even years? If
you are a mutual fund trader, trend lasting less than several
weeks will be almost impossible to profitably trade.
It is easy to determine trends on an historical chart.
Looking at trends that have already occurred. But developing
a trading strategy that will keep you on the right side
of future trends is needed to profit from trend trading
Note that we do not say market timers can "predict" the
future. We are not of the crystal ball camp that dooms
many market timers to failure.
Instead, we say that trends tend to last for periods of
time that make them tradable. So identifying trends, and
jumping on board, is the key to profitable market timing.
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Successful market timers know
and use several facts about trends that give them an
edge in trading them:
1. While financial markets may spend time in consolidation
(sideways trends), they are more often moving up or down
for sustained periods of time.
2. A timing strategy that defines trends can be
used to take advantage of continued momentum in the market
3. Trends tend to go higher, or lower, than most
investors expect. So correctly identifying and trading
a trend can be very profitable.
timers usually make the majority of their profits
in only one or two trades a year. If you don't
take every trade, you will likely miss the one
that makes most of your profits."
4. Profitable trends typically occur
only once or twice a year. The rest of the time the markets
Because tradable trends only occur once or twice a year,
market timers must be prepared to sometimes wait months
before catching that one highly profitable trend.
a. To be consistently successful over
time, market timers must have clear rules telling them
when to enter, and when to exit.
b. When in a sideways trend, market
timers may have trades that result in small losses, or
small gains. These small losses and gains "must" be accepted
because timers "must" trade every identified trend change.
There is no way to know "ahead of time" which trend will
be the highly profitable one.
c. Market timers usually make the majority
of their profits in only one or two trades a year. If
you don't take every trade, you will likely miss the
one that makes most of your profits.
d. When the markets are in a bullish
or bearish trend, trading position changes may not occur
for months at a time as the trend progresses. Exiting
early to lock in profits can cost you dearly. The trend
must be allowed to play out without making unnecessary
trades because of volatile short-term conditions.
e. A profitable trading strategy will "not" allow
a market timer to miss that trade!
Correctly identifying and trading financial market trends
with mutual funds, ETF's and even carefully selected
stocks, is doable, profitable, and with a well-tested
trading strategy can achieve results far above "buy-and-hold" investing.
Market timing, when following a well thought out trading
strategy, is actually "less" risky than a buy and hold
approach. Imagine the benefit when all bear market losses
are removed from the equation!
The active investing style used in Fibtimer's market
timing strategies (identifying and trading trends) prevents
huge losses in the inevitable bear markets (or any large
decline that is of substantial duration).
If bearish strategies are used in the timing strategy,
declining markets actually add to profits as they did
in our Bull & Bear Protimer Strategy in 2001-2003
Market timers, when following a well defined and tested
timing strategy that identifies market trends, will consistently
beat the market over any fair time frame.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.