subject: Does Trend Following Work on Stocks? [print this page] Does Trend Following Work on Stocks? Does Trend Following Work on Stocks?
Does Trend Following Work on Stocks?
Trend following is a reactive trading method. It does not anticipate a move before it happens. It does not forecast or predict future price levels or price movements. It involves a risk management system that uses the current market-driven price direction. Trend trading requires that you have strict discipline to follow precise rules. Trend followers use an initial risk rule that determines the size of their position at the time of entry. This means you know exactly how many shares of stock to buy or sell based on how much money you have. Changes in price may lead to an increase or decrease of your initial trade. Adverse price movements may lead to an exit for your entire trade. This can take place in a week or in a year, depending on the strength of the trend.
Trend following is a systematic approach to trading stocks. It is a systematic method as opposed to a discretionary approach. System trading is technical by nature, meaning that trade decisions are either based on a system of price or based on indicators of price alone. There are almost as many systems as there are traders. Some systems work and others don't. Some are easy to use while some are very difficult. Systematic trading takes discipline, trust and patience. System traders understand two things very well. They will have drawdown (periods of losses), and they also know that trusting their system will offer gains in the future. You see, what happens to most traders is they want to find the crystal ballthe holy grail of trading and making money. Once they believe they have found this "holy grail," it inevitably changes and the trader must move on in search of the next crystal ball. The cycle ends when the trader is out of money.
Many Trend Followers trade specific futures markets or a combination of long/short futures strategies. So what about stocks? Does this same method of trade work for stocks? I argue yes and have provided many examples in my book Trend Following Stocks. Stocks have an inherent advantage over futures when it comes to trend following. The advantage is stocks have an unlimited upside potential. Realistically no stock will go up forever, but they can certainly go up hundreds and even thousands of percent before the trend may stop. When market conditions are favorable certain stocks can provide enormous gains. The key is first to know when market conditions are favorable. Second is to know when stocks have a high probability of being that next big winner. My trading software Market Trend Signal keeps you on the right side of the market. It gives traders top stocks that are the leaders of the current trend. An even greater advantage is that the system will keep you out of stocks when conditions are not prime for stock trading. What follows are statistics of 6 stocks over the past 10 years. The performance will show you the value of knowing when to trade each of these stocks. None of these stocks when straight up over the past ten years, in fact many of them had monstrous plunges along the way. Market Trend Signal trading software will not allow you to hold a stock that is dropping in value. A sell signal is given to allow you to protect gains. It will later give a new buy signal when conditions and trends of the stock improve.
10 year performance
Appendix Figure 1. Almost Family Inc (AFAM) trade statistics from 01/01/2000 through 03/24/2010.
Appendix Figure 2. AK Steel Holding Corp (AKS) trade statistics from 01/01/2000 through 03/24/2010.
Appendix Figure 3. Advanced Micro Devices Inc (AMD) trade statistics from 01/01/2000 through 03/24/2010.
Appendix Figure 4. Boeing Co (BA) trade statistics from 01/01/2000 through 03/24/2010.
Appendix Figure 5. BJs Restaurants Inc (BJRI) trade statistics from 01/01/2000 through 03/24/2010.
Appendix Figure 6. Beazer Homes USA Inc (BZH) trade statistics from 01/01/2000 through 03/24/2010.
Many of these examples are quite common using the Market Trend Signal Stock trading system.
