Thu 19 Apr 2007
What is Trend Trading?
Posted by Robin Bal under Investing , MoneyMatters , Stock Markets[7] Comments
Here’s a simple question-what is trading? To answer, perhaps not so simply, we first need to understand what trading is NOT. Trading isn’t about buying the fanciest chart, hanging on to something because it is a good buy, or feeling good about yourself because you can go to a cocktail party and relate to what everyone else is saying. Trading is about making money.
There are software systems that create pretty colors and tell you which stocks are safe to buy because they have moved a certain way in the past. If one particular stock has been going up and up and up, a trend follower concludes that the stock should continue moving UP! However, in order to follow a stock’s true potential progress, would you rather wait for a computer program, or be actively and directly involved in its ascent?
Picture an apple in the center of a room, surrounded by 10 traders. Consider for a moment, each trader buying the apple until everyone has owned it. What is that apple worth? It is worth ONLY what someone will pay for it. Person #1 buys the apple for $1 and takes a bite. Person #2 then pays $2 for the same apple and takes another bite. Person #3 pays $3, and so on until finally, the last person takes that final bite. Yes, the apple is STILL worth only what the next person will pay for it-no more, and certainly no less. The only person left to sell it to is the one who walked into the room an hour late, looks at the apple’s past price history, consults his software that says the smelly apple has had a great price performance, and determines that it’s a worthwhile buy. That is precisely the definition of trend trading.
Make no mistake, successful trading is about you versus the guy sitting next to you with the pretty software. Don’t waste your time trading with charts, spend your time leaning how the stock markets really work.
April 20th, 2007 at 6:54 am
Interesting post, Robs.
I’ve seen some friends of mine who used to deal extensively in stocks. For one thing, they never see the money nor the stock in the entire trading process.
It was like a numbers game … buy now, sell an hour later, pocket the difference, but still the money is only in the heads — like HOW MUCH someone ‘thinks’ the stock is worh.
But the smarter ones, I think, were those who, at least once in a while, converted the numbers into cold cash and actually invested in some tangible assets!
April 20th, 2007 at 8:49 am
Hey Zakman, how’s it going mate?
As you rightly mentioned the smarter ones converted the numbers into cold cash. Those who never see the money are the ones who don’t follow the basics ie book profit or stop loss.
In the stock market you usually see herd behaviors, doing what the others are doing. Most people lose money in stock trading.
Do your homework, avoid very high risk investments, stay away from the crowd and don’t follow NEWS.
Cheers and take care.
April 20th, 2007 at 9:57 am
Hi Robin,
I’m a believer of marrying both technical and fundamental analysis, hence charts do have a role to play for me, especially when it comes to timing the market.
Reading a chart is actually a good way to gauge the emotional mood of the market. Personally I’ve joined short term stock competitions before and done pretty well.
My strategy for such competition was that I first sussed out companies with good fundamental. Then I select those which are ripe to go in. Once it reaches a certain %, I take profit.
Different circumstances call for different strategies.
Trend trading is good for short to mid term speculation. Speaking about trend trading, CANSLIM is a great trend strategy.
By the way, while I look like chart, I probably only spend very little time on them. I spend about 1 minute analyzing the chart to see if the time is good to enter. In addition, I only look at them after market closes.
Focusing on price movement all the time can only cloud one’s judgment because of all the emotional highs and lows.
So you are quite right to say that it is better to learn how the market works instead. And not only that, it is vital to establish a system that fits your own risk profile and personality. There is no one sized fits all plan.
Actually I’m more of the long term investor, and I like to go against the crowd and pick all the stocks which people hate. I believe that investing is for the long haul, but I do make the occasional short term trading exception in strong upwards trending momentum market.
Cheers,
Jag
April 20th, 2007 at 10:11 am
Hey Jag,
Thanks a lot mate, your comment by itself could make a post mate. Gives me an idea :wink:.
Focusing on price movement all the time only clouds your judgment, very rightly said. The more you study charts and business news all the more difficult to take a decision. I have also done pretty good in short term trading and booked profit, simply because I had laid out my investment objective (book profit or stop loss). Never fall in love with stocks they don’t always keep going up.
Also I invest for the longer term, I have learnt that if you “stay invested” long enough the stock market will outperform any other investment. Don’t panic, give it time. Buy more in corrections or crashes. Find out what is best suited for your attitude to investment risk, there is no one size that fits all.
Thanks again mate, loved your comment.
Take care and cheers.
April 20th, 2007 at 10:18 am
Trend trading is a tough game. My buddy is into it right now. Overall he’s ahead, but he’s not afraid of the risk, and I think he might have a knack for matching news with fundamentals.
Me, I might buy that apple … but I sure wouldn’t eat it! 🙂
April 20th, 2007 at 10:58 am
Hi Shane,
You are right mate, trend trading ain’t easy. Looks like your buddy knows exactly what he is doing, which is good. He probably does his homework.
I read something once about intuition in the stock market, if you don’t have it and how to develop it. Gives me an idea for another post 🙂 .
Me, Ill buy the apple and sell it after a bite. 😉
Cheers mate and take care.
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