Why is the trend our friend?
Trend trading is about losses and money management : you loose 80% of time. And then it gets compensated with the rest of 20% when you actually gain
Found an interesting article on wikipedia :
- Price: One of the first rules of trend following is that price is the main concern. Traders may use other indicators showing where price may go next or what it should be but as a general rule these should be disregarded. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is doing.
- Money management: Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.
- Risk control: Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear.
- Rules: Trend following should be systematic. Price and time are pivotal at all times. This technique is not based on an analysis of fundamental supply and demand factors.
Yes, that is what I was talking about. People think that trend systems are winning all the time while in fact it is much more about MM than "trends"
Found an interesting article on wikipedia : Trend following - Wikipedia, the free encyclopedia
This is a quote from a book from 1997 (STAD01) describing the basics of trending systems :
"Trending systems
Like the name implies, trending systems are designed for trending markets and to take advantage of all the big trending moves that may occur. In creating a trending system, the number one priority should be that the system never miss a big move. The easiest way to accomplish this is to always be in the market, that is, to always be either short or long. If you always have a position, you will always be there when the big move takes place. The other method is to always have a “stop” order in the market, resting either above or below the current price (this is the same order as a stop loss, but it is used to enter the market rather than exit). Using a stop to enter the market will protect you because if the market moves quickly in either direction you will be stopped in before the big move begins.
Keep in mind that trending systems tend to lose money in choppy, or directionless phases of the market. They have a small percentage of winning trades, that is, they make their money in a few big trades. This means that if you miss a big move, you may not have enough capital to hold out through the drawdown as you wait for the next big move.
Another design characteristic should be to limit your losses during the market’s sideways mode. Remember, no system will make money in every market condition. If the system is designed to make money in a trending market, it will lose money in the choppy phase. Your priority should be to minimize the losses in the directionless market.
Many trending systems make their money in one or two months of the year and break even or lose money for the rest. The most common indicator used in trend following systems is moving averages, most often two—a short moving average and a longer moving average.
Trending Systems have the following characteristics:
- They make 80% of their profits on 20% of their trades. This is the difficult part of trend trading—a low percentage of winning trades. You need a lot of positive self-esteem and confidence in your abilities to trade a system that loses money on 60 or 65% of its trades. You should also be able to sit through significant drawdown as the market drifts through a directionless period.
- Many researchers have estimated that any market is in the trend mode 15% of the time and is directionless 85% of the time. A trend following system then, by definition, has a low percentage of profitable trades. A trend following system is psychologically difficult to trade, but if you think you can successfully trade without constant positive feedback, it can prove to be very profitable.
Trending systems are the most popular type of system. With a high percentage of losing trades, you might be wondering why is it so popular. Very simply, trend-following systems can be very profitable overall, and this is why people attempt to trade them. Another reason is that people like to follow (and make money on) the big trends. It is human nature to want to cash in on the big moves in the market. It is innately satisfying to get in early on a trend and watch your profits soar."
So, all in all, one has to be patient and to have enough margin if he/she wants to trade a trending system
Just one PS: since it is known that the picture can say more than thousand words, here are 2 very, very simple examples. When MACD is used alone MACD is considered a trending system. Take a look at the two daily chart examples ("MACD trailing" indicator is used since ut shows nicely on chart when MACD trend has changed): of course that there are some loses, but even at a first glance it is obvious that it will end up in gains (the dots on the hart are drawn when MACD 12,26 crosses zero line).
Second example is showing what happens when the situation is extremely favorable for trending systems (even for this simplest 12,26 MACD)
All one has to remember is that trends are no looked for on a 1 minute chart - lower time frame charts are noise not trend. With proper MM and without overtrading, results are obvious from these charts. So much in this PS about trending systems. Things are actually much simpler then they look at the first glance
Hello
I've got this simple question that has been bothering me for a while.
Why is the trend our friend? I seem to get caught on this all the time. When I look to go with the trend, most of the time I mess up. Whereas going AGAINST the trend works really well for me. Is it a question of feeling, knowledge?
Does a professional trader know how to trade both?
Thanks for your help about this.The trend is really your friend, only before there is that bend in the end. Trend-following systems must have positive expectancy incorporated into them; for trend-following tend to have low accuracy. Moreover, one needs to pay attention to demand and supply levels, because of major reversal points.
When a trend start to move the price, most of the trader jump to ride it and it takes the price more in that direction so it is said trend is the friend because you can make some good money.
like they say..."with trends like this"....:)
Trends are there to stay certainly, even with less occurrence, nowadays estimated to be at 15%. I recall the backtesting of the Turtle trading system. For close to 2 decades during the time the Turtles used it, it was profitable as the markets they used in was trending alot. But since 1990, IIRC, it was totally loss-making due to the much less occurrence of trends. At the end of the day, it still makes alot sense to do prior market selection of currencies/markets and select the ones that are most trending.
The High-Frequency Trading (HFT) arena by institutions is by now close to getting oversqueezed and swamped with everyone jumping on the bandwagon. The inefficiencies that can be extracted there are getting about done, & some institutions have made a switch to more general intraday trading while others are seriously considering. Where it used to be a game area of milliseconds, it has become a game of 1 millisecond, which is pretty much extreme. Even with Moore's law of doubling of computing power holding true still, there is still an economic limit to computerized response time. If this is anything to go by, we probably will see a slightly increased resurgence of trends in the decades to come. IMHO
Yours sincerely,
Wintersky
When the market goes up, you want to be long,
When it moves down, you want to be short,
This is why you want to be frends with the trend
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
You agree to website policy and terms of use
Hello
I've got this simple question that has been bothering me for a while.
Why is the trend our friend? I seem to get caught on this all the time. When I look to go with the trend, most of the time I mess up. Whereas going AGAINST the trend works really well for me. Is it a question of feeling, knowledge?
Does a professional trader know how to trade both?
Thanks for your help about this.