If there is any secret in trading, then it is to trade the trend. So, what is the secret of trend trading then? In its simplest form it is using the right stop loss method. Stopping a loss does what it implies, but for trend trading there is much more to it. It virtually guarantees that you are actually trading trends!
The robust trend trading stop loss system logic looks like this:
- If a trade is still going on and the stop hasn’t been hit, the trend may be also still going on.
- If the stop gets touched and the trade closed, the trend may have come to an end.
This simple matrix of trading logic has of course to be seen probabilistically. Everything can happen all the time in trading and elsewhere. These two stop loss vs trend rules are not meant to be absolutely true. They are only statistically true. And in their simplicity lies their beauty.
The second secret of trend trading is then to try again and again. Clearly one will often get shaken out, the tighter the stop the more often. If a trend trader doesn’t constantly try to get again on the trend, the best trends will go through the roof without him. Generally that may be a good thing, but in trading it is definitely not. Going though the cellar is what a trader should avoid.
The stop secret and the try it again secret can be combined into one coherent method. Switch your position between long and short as soon as the tide flows against you. This is done best with automatic trading software. Believe or not, but splitting trading responsibilities into two parts, one for the human trader and the other for a mechanical system, is the way to go.
As an aside, there are of course other ways to trend trade, like using day trading techniques for the entry and another set of rules for a longer holding.
Day trading entry points are still judged best by human traders. Sure, there are high speed trading schemes, arbitrage combinations and all sorts of other short-term trading methods with automated systems at work today. But the typical trend riding intraday is probably still done best by human traders who are able to understand news and emotions.
So, back to the mechanical system for trend trading in a longer time frame. It should always be fully invested to resemble the ever trying trend trader who is only trading in one direction at a time.
As usual for Penny Stock Alerts, here does it show up again, the mystical trading formula that forecasts the near trading future. Is there such a thing? It depends on what you expect. For instance, this neural net trading algo comes close. Of course it works only statistically. Neuronal networks are better able to adapt to a specific price history. Essentially they are black trading boxes.
No problem. As long as it works, said the beach trader and focused again on the human part of this composite trend trading system, the selection of the right longer running trends.
Oops, while strolling down the beach, we accidentally stumbled over the real secret of trend trading…