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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Now this is all very important to trend traders because the strategy in and of itself is already contrarian. It goes against the rule of “buy low and sell high”. You are using trend trading to profit whether or no the market is up or down and even whether or not the stock is going up or down. Rather than trying to anticipate what the stock or the market are going to do based on fundamental analyses, you as a trend trader are making educated guesses about the what’s going to happen based on real-time first-hand observations. You must be keenly aware of volatility, and how much money you wish to risk. As common sense may thus dictate, using software programs can be of great assistance to you for making these sometimes tricky calculations.

Likewise, trend trading systems are supposed to be pre-programmed, in a sense. You are doing all that you can to remove emotion from the equation. You want to enter into a position knowing your exact time horizon in advance. You must also be ready with key stop-loss orders in case it turns out that you have made a bad assumption or a surprise in the stock or that stock’s market sector leads to quite a different turn of events with its trending than you anticipated. And then there’s the fact that you are supposed to follow a trend after it is already in motion, which means that you have to know how to spot them, picking them out from the “crowd” and the “noise” of the trading masses.

So, to sum up, for trend trading you need to consider all of the following:

*Stock price

*How much you are going to risk

*Your time horizon

*Your exit strategy

*The placing of stop-loss orders

It’s also quite important that you pick one stock or one sector and stick with it, having an intense focus upon it. A trend trading software program, which does not require food or sleep and which is not prone to lapses in attention, is an ideal tool for getting this focus in place for you and feeding you the data that you need. Use software programs to help you with all of your finer calculations so that you can capitalize on trends and not worry about your emotions getting in the way.

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One of the most often used trend trading systems out there is the GMMA, or the Guppy Multiple Moving Average. With the GMMA, the trader puts together two different groups of moving averages that have different time periods.

One of these groups is quite often used by traders with a short-term horizon. The number of days in their time horizon is, most of the time, one of the following: three, five, eight, 10, 12, or 15. For those who are involved with long-term investing as trend traders, they use time frames that consist of 30, 35, 40, 45, 50, or 60 days.

Traders use this relationship between these two different groups of moving averages for determining whether or not the outlook of the short-term traders squares with the long-term traders. It is thought that this cross-checking enables greater objectivity and, therefore, makes sure that the traders aren’t relying on their emotions to make their decisions.

Changing trends get identified by the point where the two different groups of moving averages intersect. A bullish trend means that the short-term MAs are above the long-term MAs, while of course the opposite is true in the event of a bearish trend: the short-term MAs are below those of the long-term MAs.

Trend traders may also use the Exponential Moving Average, or EMA. With this tool, the trader places more weight for decision making on the latest moving average, although he pays attention to all of them within his time horizon. So EMA also gets called the “exponentially weighted moving average”. An EMA responds faster to recent price changes than does a simple MA. The 12-day and 26-day EMAs are the most widely used short-term averages; they get used for producing indicators such as the MACD (moving average convergence divergence) and the PPO (percentage price oscillator). Long-term trend traders would look to the 50-day and 200-day EMAs for their signals.

For trend trading, there also needs to be risk management in place in the system. The simplest way of managing risk is to use the 2% rule. This very simply means that you as a trader take the value of your investment account or portfolio and calculate what 2% of it is. This is always the largest amount that you will invest into trend trading at any given time. The 2% rule keeps you from losing your shirt and your house with your investments. If you make money, you add that to your total and can risk more and more. But if you lose money, you don’t lose that much compared to your total money, plus you keep diminishing your total investment until you start earning more again.

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