Financial markets are dominated by the large players and random. Big capital has always advantages. Banks and hedge funds have insider knowledge, better technology, a huge staff, and more experience. They also have much more capital, which enables them to manipulate the price, of course legally. Every trade shifts the price into the direction of the trade. They can do all sorts of tricks with being able to get the price where the want it to be.
One of the basic methods is to ignite a breakout of a trading range. Start from the other end of the range with loading the gun, drive the price through the range, and then sell into the buying frenzy of… the smaller traders. Alternatively keep on holding the position if things go well. If they don’t, no problem, the loss of the big fish will be the smallest one. The manipulation of this chart pattern could even have started earlier, by forming the range itself, buying at the lower edge and selling at the upper one.
But driving the price is a two-edged sword. Large capital can’t make use of the stop loss technique. The liquidity is simply too small in most cases. Instead large players often try to stabilize the market to prevent it from further going into the wrong direction, hoping that the tide will change somewhere down the road. This may work, but it also may make things works, because it adds to the wrong position.
Trend trading and stopping a loss are almost like the two sides of a coin. Getting in something that looks like a trend, could become a trend, or is clearly a trend is a good starting point for a trading system. Executing a stop then, means two things. Of course, a threatening loss will be mitigated.
But there is more to it. Astonishingly using a stop loss completes the trend trading system. If you got stopped out, your position wasn’t in a trend anymore. If you are still in, you are on a trend. Simple and robust.
Here we have it, the advantage of small capital trading people. They can use the stop loss system. This is almost equivalent to the idea that trend trading or trend following is especially for the small trader.
Small investors out there, did you get the message? Half of you did probably not, so I say it more directly. Investors buying low and selling high give up the biggest advantage they have. You small value investors could and should all become investing trend traders.
What about the distinction of trend trading and trend following? At least trend trading, which may imply swinging in and out of a trend, as opposed to trend following that is trying to catch larger chunks of a trend, is only working well for small positions.
For instance, look at the video of how this end of day signal trading software works. Many signals, resulting in short holding times of only some days. This type of neuro-trading works even in flat markets. Markets that go up and down without a trend. Used in a trend, you can expect holding times to increase and profits to increase seriously.