Roll with the Market Trends – Safe and Profitable.

Roll with the market, don’t fight it, give it your best, and be confident.

Observe. Be cautious when the time is right but run with market when it shows momentum and be prepared to exit when the tide turns. Easier said than done but here’s some tips to help you.

Technical (Price) Analysis helps many traders, and these tools can help them make informed decisions based on price movement and patterns such as trends. They’re easily identifiable. It’s what Stockradar does it follows price trends. We have rules that identify a trend when it starts, and when it ends.

Too often we lack the ability to identify a change in trend or are simply to slow to recognise the change – probably because we don’t want to!

Treating the market with objectivity does this for you and is essential for clear headed trading. It’s the cool heads the make the cool decisions. Trends are safe and profitable if we let them be.

Again, it always comes back to us, our egos, and biases. These must be identified and managed in an objective manner.

What are the positives?

Market Psychology helps market participants follow trends due to psychological factors such as herd behaviour. It’s a recurrent theme though every aspect of human nature from fashions trends to food trends. We follow them until they end and then move on to the next one. Catch the wave and ride it.

The Profit Potential is Amazing when you get it right and that is done by playing the numbers game and following trends. Identifying the odds and probabilities and managing them with stops. You can’t get them all, but you can get the ones you cover. It is a finite game and thus you need a degree of control. Define the number of stocks you cover and the number of stocks you will hold. This gives you a manageable and finite control over your strategy.

Trends tend to persist for a certain period (PME and CAR are current examples) and during that time, prices in the direction of the trend may experience significant price movements, not all but some and it is important we have a high probability of being exposed to uptrend stocks. Traders capitalise on these movements to generate profits and must have a strategy to do it. The odds suggest it is the stocks with uptrends that will likely experience the ‘kicks’ higher.

Reduce and Manage Risk. Trading with the trend is less risky than trying to go against it. When a market is trending, there is often a higher probability that the trend will continue rather than reverse. This can reduce the likelihood of losses compared to counter-trend trading.

Markets can be unpredictable, and trends can reverse suddenly. Trend traders use risk management strategies such as setting stop-losses to manage risk. Both loss risk and profit risk. This is where the cut your losses and run your profits adage comes from. It’s true, very true.

The stop plays an important role, but it must match your time frame, risk profile, and strategy. It must be far enough away to allow a price movement to breath but close enough to protect the profit you have. It’s a number and a fine balance and there is no perfect number so it is important to manage your expectations. I use a maximum stop loss (risk of 15% for 3 main reasons.

1. It’s the maximum I am prepared to risk. That’s a very good reason.

2. It’s the maximum amount I am prepared to give back from the high of a profitable trending move. This process ensures I lock in profits.

3. It only requires a 17.6% return on funds left over to get my money back. That risk is acceptable. Once you start blowing out losses above 15% it gets harder and harder to get your money back for example if you lose 50% you must gain 100% to restore your funds and that’s hard work. We don’t need to make this game any harder than it is. Even at 35% it takes more than a 50% gain to get your money back. This can put enormous pressure on your trading and put you permanently on the back foot. Not a good strategy and psychologically debilitating.

15% is a number I have worked with for sometime, and it seems to work well enough to generate positive returns over time. This accounts for both bull and bear stages.  On the negative side slippage can cause losses to blow out above the 15%. On the positive side often stops are tightened to less than 15% for reasons of excessive price momentum or perhaps enduring price hesitation caused by resistance. This can deliver profits 5-10% from the top. It’s a sensible trade-off.

One of the worst things traders can do is let their profits disappear as they watch prices decline in the ‘hope’ they will restore their value. A mugs game. Often it won’t especially in the case of a strong momentum swing higher. Once that momentum is lost is rarely reappears.

Good trend trading is riding the trend and exiting when the tide turns, and a 15% stop suits me. A trend trader never gets the top or ever gets the bottom. A good trend trader waits for the trend to establish itself before jumping on board and exits the trade when the momentum subsides bringing the price back below the stop.

You can Automate it: Automated trading systems, including algorithms and trading bots that can often be incorporated into trend-following strategies. These systems can analyse market data in real-time and execute trades based on predefined criteria. Not for everyone but it is a technique that can work well.

Market Types and be Adaptable: Identify them. Bull, bear and sideways. The last two years has represented a frustratingly choppy unfriendly trendless market that has presented few good opportunities. The market has now turned and all of a sudden more opportunities are appearing with price gains becoming more lucrative. Remember the market spends 81% of its time rising and 19% falling. Fact. Thus the odds suggest ……. Therefore, it’s essential to be prepared to adapt to changing market conditions and use a well-rounded approach to trading and investing.

Don’t forget to keep yourself focused and remind yourself of the inherent  biases we carry that affect our trading, we need to identify them, accept and control them or better still eradicate them. Click here for help

Our trend and ‘wave’ approach to trading is devoid of fundamental or news input and purely focuses on riding the price waves. Fundamentals can fool you because they don’t necessarily relate to the price action, but the price never lies so we just follow it with no predictive bent other than. a trend continues until it ends. This might sound foolishly simple but with this sort of mindset it is hard to go wrong. Once we start predicting or getting overconfident and reckless we are lost and your trading suffers.

When l look at a chart like PME or CAR (14/2/24) why would you get out? Well, PME has just hit its stop (the first time we have seen a correction of 15% since the trend began) so out we go as seemingly the trend has ended but, with a handsome profit of 50% in 15 months more than exceeding our objectives. Now we move on. CAR will do the same thing at some point and that’s what stops are for. But while the flow is still with the stock you hold.

That’s the way Trends work.

That’s what they are.

Don’t ask too many questions,

just go with the flow

and follow the Trend.