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.
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