Does trend trading work?

The short answer is, yes it does. This is why it is one of the most widely used of all trading strategies. Institutional as well as individual traders use trend trading widely. However, the longer and more detailed answer is that you have to do what you’re doing for it to work for you. You need to understand your own motivations and understand why trends are important, and how they work.

Trading with respect to a trend produces far greater opportunities to make money or to hedge against loss than trying to make guesses about what seems to be random stock price movements or market movement. However, what you have to be cautious about is the fact that for particular assets or market segments, trends aren’t that common. There are some stocks or industries where there are no clear trends over 70% of the time.

Trend traders have to have discipline and they must have systems in place so that they aren’t shooting “from the hip”. Trend traders may use tools like A-D Lines, the GMMA, and the EMA. But investors who don’t use these tools may rely on more complex ones and try to pick out individual stocks based on those tools. The problem there is that you must have a well-developed technical prowess with the financial markets to be successful with, or even properly understand, those more complex tools. Trend trading allows you to be successful with much more basic, elemental tools and trading techniques.

90% of the biggest opportunities for profits in the market only occur 10% of the time, and these almost always occur within a defined trend. When you use trend trading, you don’t get caught up in volatility, the “heat of the moment”. You use a rational approach to view, somewhat from a distance, where others are driving the market or the stocks that you are trading in or considering trading in. You are only going to hold a position until you see that it is going to trend in the other direction, and then you get out–hopefully with some profit-taking.

How can you assure that trend trading will work for you?

*Pick just one stock or one segment of stocks and focus on them. Don’t spread your attention too thin when it comes to trading trends.

*Don’t be too quick to get out of your position. Know your time horizon and try to hold your position as long as you possibly can with respect to that horizon.

*Also, don’t be too slow to close out your position. Use the system, not greed.

*Don’t alter your time frame. Once you have selected it, commit to it. If it doesn’t work out, change it the next time you enter into a position.

Learn how you can get 6% monthly returns in just 5-10 minutes a night after the markets have closed by spotting trends with this low risk trading strategy.

Low Risk Trading

When it comes to trading strategies, it seems like just about everybody has their own little scheme for getting massive returns.

Heck, just do a search online and you’ll find people claiming to have the secret to getting 500%, 600%, even 1000% yearly returns.

All you need to do is give them a bunch of money and they’ll reveal their secrets to you.

If you dismiss the outright scams, you’ll find that the ones that promise those kind of returns do so at dramatic risk to your entire portfolio.  Sometimes your exposure can be 10 or even 20% of you’re entire portfolio.

If you have a few losses in a row (and every system will at some point no matter how good it is), you could find yourself wiped out.

Let me give you an example of why you really need to stick to low risk investing strategies and keep your exposure at a minimum.

Let’s say you have $30,000 in your account and you have a few bad trades and your account is reduced to $18,000.

You’ve just lost 40% of your account.  What percentage of a return do you need now to get back to even?

The typical answer is, “Well, I lost 40%, I have to make back 40%.”

Wrong!

Since you lost $12,000, you now have a lower base of money to work with so undoing that $12,000 loss requires you to get a 66.6% percent return on your money just to get back to even.

Remember, you are going to have losing trades and no matter how good your system is, there will be times where you will have multiple losers in a row.

Here’s a breakdown so you can see just how much you’ll need to get back when you lose a percentage of your account.

Drawdown  % To Get Back To Even

10%       11.1%

20%       25%

30%       42.8%

40%       66.6%

50%       100%

60%       150%

70%       233.3%

80%       400%

90%       900%

Are you starting to see why professional money managers are only willing to risk at most 2% per trade and more often it’s .5% or 1%?

Even if you have 10 consecutive bad trades, if you’re risking 1-2% of your account, you’ll be down about 20%.  A good trade or two can make that up.  Beyond that, however, and you’re entering risky territory.

As far as low risk trading goes, there is one system that I recommend above all others.  It takes only 5-10 minutes per day to do after the markets have closed, and averages a 6.43% return each month.  (With monthly compounding, that’s over 100% a year.)

It’s called ETF Trend Trading, and it’s really an amazing system and definitely a low risk system.

Here’s an interesting piece of trivia.  Warren Buffet became the world’s richest man by averaging a compounded annual return of 22%.