Trend trading is the most direct system to counter the two adverse forces existing in any financial market:
- Other players with severe advantages
- The ubiquitous random price movements
Like killer waves on the ocean arise out of a sea of small oscillations and unpredictable noise, sometimes a coherent movement, the trend, emerges out of nothing.
Fundamental changes of price levels are well known to stocks and commodities and are also observable in Forex. This phenomenon is independent of the underlying medium. It occurs whenever something is tradable.
Straightforward we arrived at the first and most important secret of a trend trading system. Like a fishing boat that has to go to the right place and then get out the net, the trend trader has to get into the market when chances of a newly forming trend are heightened.
But what is the net of the financial fisher for trend trading? In its simplest form it is the stop entry and exit method or at least the stop loss execution!
Be at the right place at the right time, enter the market and exit it with the right stop loss system. If you don’t choose the outright wrong place, say a dull stock that clearly has no real upside potential, this system works even with a random entry.
For many traders the basic secret is having a trading system in the first place. You already knew that? Then just think about how well your trading worked, how often you changed or tweaked your system, not to mention those times when confusion or even despair set in!
Many novices are not aware of the necessity of a trading system, but many seasoned traders won’t believe that they have either:
- A trading system that has contradicting elements in it, which inevitably means it can’t work really, or
- a trading system that works but tries to exploit something where not much is to gain, or
- a trading system that doesn’t fit their trading mentality, which means they can’t execute it.
If you have a trading system that works, trust for this system is building and it gets easier to execute it. That is the first step.
All system trading is eventually discrete, simply because a trader has to choose a system, then configure it, adapt it, choose the right markets, watch for extreme situations where to change the rules and so on.
If the trading system works with trends and sometimes yields superior gains, strong optimism follows and finally a trader’s sync with the markets sets in.
This is the real secret: Be in sync with the market and foresee where the killer waves may show up. Having the right system that gets you on the forming trend is of course the other part of the equation.