Trend Following: Don’t Think, Just Buy!

Start your Free Tomorrow In Review Preview - Sign Up Here:

Feb 5th, 2013 | By | Category: Featured, Investing Strategies, Trend Playbook, Trends
leadimage

I’ll bet you never thought someone would tell you “Don’t think, just buy” was good investment advice. But in a moment, I’ll show you why it is…

Today, I want to clear up some misconceptions about how to build generational wealth as a trend follower. Here is a question I received from a reader:

“What is the trend-following system you are using, as I couldn’t see a particular article since I subscribed about how to use this?”

— Stephen

It may sound surprising, but historically, simple is better for trend-following strategies. The foundation of our system is a 300-day moving average. I introduced it back in September (you can read the full write-up here).

Why the 300-day moving average?

A moving average is a stellar indicator of trend — if it’s moving steadily higher, then we know that a stock is generally moving higher over the time period that we’ve set. At 300-days, the MA is long-term enough to catch only big primary market trends. Most importantly, we can define moving averages mathematically, so we’ve got a completely unambiguous signal that a stock is trending higher if it moves above the moving average.

The system has a few extra tweaks and rules added to boost its profitability, but the 300-day moving average is the foundation.

Not everyone is a fan of my time frame, though. Like this reader:

“Are you joking with a 300-day MA? When I apply it to my [S&P 500] chart there are no trades! If I use a 200-day [moving average], then the only buy signals would have been on Nov. 19, 2012 and Dec. 28, 2012. So what does one do after missing those signals? Read a book?

“Come on, now. There must be signals that occur each day or so?”

— D.J.

He’s right. This sort of a trend-following strategy doesn’t generate a whole lot of signals…

But that’s kind of the point.

For starters, you don’t want to apply this system to just one market — it works best when you use it to find that primary trend in a basket of low-correlation asset classes. And frankly, I wouldn’t trade every signal that the system threw out; I’ve found the best success rebalancing once a month. That’s it.

In fact, already I showed you how upping your trading frequency can destroy your returns.

When you’re using a “slow” moving average (like the 300-day) to generate signals, you also want to use a slow trading frequency. You can’t mismatch the two.

Of course, you could always use a faster signal to get weekly or even daily signals. But the question is whether you’d want to. By just making your one trade a month with our slow system, you could have made some enormous gains with tiny risk. That’s in part because the underlying primary trends in global markets are slow too.

In other words: If you can earn 80% of the gains trading only 20% of the time, why wouldn’t you?

If you want to ramp up your potential returns (and risk), add some more volatile assets to your radar (like futures). And when you’re waiting on a trading signal, sure, read a book. I recommend this one…

This last question is an important one. It comes after last week’s update from our system said we should own stocks:

“Yikes, I just took profits in my equity funds and put my money in a commodity index because I felt like it was giving me a buy signal and stocks are getting frothy like a blowoff. Let me know if I should reverse my decision or if I am OK, just a bit early.”

— Bill

It’s easy to overthink the signals that get thrown out by a trend-following system. I certainly have my own analysis on where the stock market is headed in 2013 — but as far as my trend-following portfolio is concerned, it doesn’t matter one bit.

When you’re using a trend-following approach, don’t think, just buy. (See, I told you we’d get back to that!)

It’s important not to overanalyze your trading signals. The heavy analysis comes into play when you’re developing your system, not when you’re trading it. If the statistics and back testing indicate that your system works, then that’s when you take your hands off and start listening.

By its nature, a trend-following approach is going to spit out trading signals that you won’t want to follow from an emotional standpoint. If you want to be successful, it’s critical to blindly follow the system…

Sincerely,
Jonas Elmerraji, CMT

Related Posts


Author Image for Jonas Elmerraji

Jonas Elmerraji

Jonas Elmerraji, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes, and a contributor to Agora Financial’s Trend Playbook. Jonas got his start on the fundamental side of the market, poring over financial statements and valuations to find sound investments – today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com, and has been featured as an investment expert in Forbes, Investors Business Daily, and CNBC.com among others. 

Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Start your free Tomorrow in Review email subscription...

  

We Will Not Share Your Email Address
We Value Your Privacy

Related Posts


Tags: , , , ,
ShareThis
Print This Post Print This Post

9 comments
Leave a comment »

  1. Really being a trustee is usually a gratifying expertise. A trustee is within the placement to provide a advantageous service to beneficiaries who may additionally be family unit members and mates. Really being organized and preserving duties in mind should help make the operate a lot easier and much more enjoyable.Five Issues to maintain in mind when Applying for a Home finance loan
    ルイヴィトン 激安 長財布 http://www.ageconcern.bm/admin.....-2013.html

  2. Financial institution of The usa did not comment on the subpoenas. It reported it’s going to continue on cooperating with Cuomo’s company and believes there isn’t a basis for rates from the financial institution or executives. Lewis has formerly testified prior to Cuomo’s company. Securities and Exchange Fee rates that it lied to shareholders with regard to the bonuses.
    Louis Vuitton ヴェルニ 財布 新作 http://www.jhdfamilies.co.uk/u.....itton.html

  3. Simply, the brand new, unified menu has many of the same dishes which the two menus shown individually right before. You will find the spiced crab cakes with Goan guacamole, the riceflakecrusted fish, the array of tandoori flatbreads, and so on. It appears which the plan was to streamline, also to give diners far more influence more than what amount they are consuming and expending, no matter if sitting upstairs or downstairs.
    Louis Vuitton 新作 長財布 http://www.jhdfamilies.co.uk/i.....itton.html

  4. Well before we dig into the library, let’s begin with the components. The Ouya is very small in comparison with the behemoths that regularly serve as video clip recreation consoles. That’s the advantage of dependent on the digitalonly games library. Relating to the again are ports with the energy adapter, USB, ethernet and HDMI (a HDMI cable is bundled). Furthermore, there’s only a lone Strength button on best. Comparable to smartphones, Ouya components will launch on an yearly basis, with tweaks to bolster its specialized functionality.
    ルイヴィトン 新作 バッグ http://www.qacomputing.co.uk/r.....itton.html

  5. Whether it is Anant Kulkarni from Maharashtra’s Ahmednagar who dropped 35 members of his crew while in the calamity or Pune resident Hemant Kulkarni, who dropped keep track of of 24 of his pals after the tragedy, all of them have a very typical tale to tell.
    Louis Vuitton 新作 バッグ モノグラム http://www.mikehaywoodart.co.u.....n-buy.html

  6. Simply because the flood insurance application is administered via the federal authorities, communities should abide by FEMA rules accurately as well as a lot more strictly in order that they don’t reduce their qualities to purchase flood insurance, stated Ron Burton, director of planning in Port Arthur. Now, town of Port Arthur closely screens all new development because of the ordeals it experienced along with the latest hurricanes decimating buildings during the city.
    ルイヴィトン ヴェルニ 新作 財布 http://www.glykaemisk.dk/image.....itton.html

  7. Hi

  8. Home loans from Firstblue come with attractive features.
    Everyday we hear stories about how the mortgage company lost the paper work or claim they never got it.
    Although at this stage his wage is relatively much less however
    he has good future prospects.

  9. Heya exceptional website! Does running a blog similar to this take a lot of work? I’ve very little knowledge of computer programming however I had been hoping to start my own blog soon. Anyhow, if you have any recommendations or tips for new blog owners please share. I know this is off topic nevertheless I just wanted to ask. Kudos!

Leave Comment

By submitting your comment you agree to adhere to our comment policy.