Newer traders as well as veterans alike have been indoctrinated into the importance of “trend” when making buy and sell decisions. Traders that are strict about trading in the direction of the prevailing trend refer to themselves as “trend followers,” as they will wait for a trend to establish itself before making a trade. This strategy works fine when the market has a strong directional bias, however this isn’t always the case as the market can spend months without a trend.
When markets are range bound, in other words, when they vacillate back and forth without a clear direction, a trend following strategy will usually end up losing money. The premise of this type of strategy is that when a strong trend finally develops, a trader will stay with it until it reverses, and if the move is sizeable, the profits garnered by such a move should more than make up for the small loses taken in a choppy non-trending environment.
Before all the technological advances in trading such as electronic routing and the much maligned high frequency trading (HFT) machines, the markets tended to be much trendier, meaning that markets would persist in a solid direction for… Continue Reading
