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Trend following strategy

While this important principle is well-known, traders violate it surprisingly often. A trader would identify a security to trade and would come up with a preliminary strategy. They are looking for bargains so they prefer to try to buy at the very bottom or sell at the very top before new trends become established. Winning traders have learned to wait until a trend is confirmed before taking a position consistent with that trend.
  1. Stick With The Plan

    : This may seem like a common sense statement, but the reality of market timing is that the majority of timers "think" they can stick to a timing strategy, however when the market moves against them, as it always does as some point, they are swayed by financial news stories, the desire to be "with" the crowd, and their own emotions, often exiting the strategy at exactly the wrong time.

    When you start following a trend following strategy, plan to stick with it for several years. That is how the smart money makes profits. They do not let emotions rule their marketing decisions. They stick with the plan!
  2. Price

    : One of the first rules of trend following is that price is the main concern. If a market is at 60 and goes to 58, 57, 53 - the market is in a down trend. Despite what every news show might predict, if the trend is down, stay with the trend. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.
  3. Money Management

    : The most critical factor of trend following is not the timing of the trade or the indicator, but rather the determination of how much to trade over the course of the trend.

  1. The Trend Is Your Friend - Trade With The Trend

    : It is great to catch a reversal. It is also very difficult. Let me tell you that again.... it is almost near impossible. We read stories of those who have perfectly caught a reversal, but they are news stories "because" it is so uncommon.

    It is much easier to wait for a trend to begin, and then jump on board. If the trend fails, and some do, a well managed timing strategy will exit to cash, or reverse position, with only a small loss (or even a small gain). When the trend keeps going, that same well managed timing strategy rides the trend as far as the trend goes. This is where the power of trend trading is seen. By never missing a trend, and staying with the trend, trend following market timers make huge profits over time.

    Finally, one of the most dangerous trading methods is to take a contrary position and pray for a reversal. Such trades rarely work out. But many, many traders try them. And... many, many traders lose a lot of money.
  1. Risk Control

    : Trend following is grounded in a system of risk control and money management. The math is straightforward and easy to learn. During periods of higher market volatility, your trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective of this trend following strategy is to preserve capital until more favorable price trends reappear. Cutting losses is the way to stay in the game.
  2. Let Your Profits Run - Cut Your Losses Short

    : The second part of this trend following strategy (cut your losses short) is the toughest one. It involves admitting that you were wrong. But in market timing, as in "all" trading, it is a rare moment indeed where you will eventually be proven right after first being proven wrong.

    There is a reason for this. It is easy to make back a small loss. But large losses are not only hard to make up, but the psychological pain you experience from them could cause you to quite the strategy. And quitting with a loss not only guarantees that you will lock in the loss, but it is likely to have a detrimental effect on your buy and sell decisions for a long time.

    The opposite of course is "letting your profits run". That means don't ever limit your profit. This is why small losses should not be a concern to you. As you should always keep that in your mind that when you have your next profitable trend, you will ride it to the end.
  1. The Rule of all Rules

    : Trend following should be systematic. Price and time are pivotal at all times. Trend Following is not based on an analysis of fundamental supply or demand factors. Trend Following does NOT involve seasonals, point and figure, Market Profile, triangles or day trading.

    When you trade with the Trend, try to answer these critical questions:
    1. How and when to enter the market.
    2. How many contracts or shares to trade at any time.
    3. How much money to risk on each trade.
    4. How to exit the trade if it becomes unprofitable.
    5. How to exit the trade if it becomes profitable

    Always remember, never take timing decisions based on tips. A tip is rarely more than opinion, and frequently a bad one at that. Burn this into your head! Unfortunately, in market timing, a "friend" is not always a friend.

    Stick to the timing plan. Trade with the trend, cut your losses short and let your profits ride, and never, but never, follow others completely. Successfully following and profiting from a timing strategy can be accomplished only by you, and you alone.

The daytrader

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  6. Follow the trend
    1. Trend following strategy
      Traders violate it surprisingly often!
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