- The Market
- Winning and Losing
- Investor v. Trader: How Do You See the World?
- Fundamental v. Technical: What Kind of Trader Are You?
- Discretionary v. Mechanical: How Do You Decide?
- Has Trend Following Changed?
- Trend Following Modus Operandi: Follow Price
- Follow the Trend
- Handling Losses
- Key Points
Trend Following Modus Operandi: Follow Price
Trend followers generate phenomenal returns because their decisions are ultimately based on one piece of core information: price. In an increasingly uncertain and, these days, downright unfriendly world, it is extremely efficient and effective if our decision-making is based on this single, simple, reliable truth. The constant barrage of fundamental data, such as price-earnings ratios, crop reports, and economic studies, plays into traders' tendencies to make trading more complicated than it needs to be. Yet, factoring in every possible fundamental still does not tell a trader how much and when to buy, or how much and when to sell.
It is not unusual for many traders to become familiar with and focus on only one market (usually in their own country) to the exclusion of all other global opportunities. Seeking to maintain the maximum degree of comfort, they follow this one familiar market's movements faithfully. If they specialize in stocks, they wouldn't dream of branching out into currencies or futures. How can a stock trader know anything about currencies? The idea that you could know enough about Cisco and soybeans to trade them both seems unfathomable to some. But think about what cotton, crude oil, Cisco, Sun, GE, the U.S. dollar, the Australian dollar, soybeans, wheat, Microsoft, EMC, and Oracle all have in common. Price.
[Trend Following] is motivated by a very broad interpretation of the universe. The underlying belief is that economic systems adjust to changes in fundamentals gradually and over long periods of time, and that the consequent trends are evident everywhere in human history and commerce. Political, economic and social regime changes trigger price adjustments in markets that don't happen instantaneously. For example, the growth and decline of the Roman Empire took place, not in a day, but over hundreds of years. A major problem, of course, is that markets don't move from one state to another in a straight line: there are periods of countertrend shock and volatility. We spend most of our time trying to find ways to deal with those unsettling but inevitable events. That being said, it is really not difficult to put together a simple trend-following system that can generate positive returns over a realistic holding period ñ and there are many, many commercial systems that have been generating strong, albeit volatile, returns for a long time. So there are definitely firm grounds for believing in Santa Claus.
Paul Mulvaney CIO of Mulvaney Capital Management Ltd.
Market prices are the objective data. You can compare and study prices and measure price movements, even if you know nothing about the markets themselves. You can look at individual price histories and charts without knowing which market is which and trade them successfully.