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Trend Following - How to Get One Up on Your Peers

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  • Trend Following - How to Get One Up on Your Peers

    What if I told you there was a way to improve your financial situation versus your peers. Would you be interested? According to a November 2009 survey of high net worth investors by Investment News, 99% of wealthy individuals and almost 90% of mega-millionaires felt that their financial situation is somewhat worse or much worse than their peers.

    Now why would this be the case? One answer comes to mind, the wrong approach to their investments. It was too easy during the 1980s and 1990s to hire an investment advisor or manager and get market like returns with little downside volatility. However, as we entered the twenty first century something changed, we entered a secular bear market.

    Secular bear markets are periods of great volatility of return and little upward price movement outside of a large trading range. Such periods last between 17-25 years on average. Here is what has happened in recent such periods in the economy:

    Market Period - Annual Return





    The only way to make money in secular bear market periods is to trade the large up and down swings of the market. Buying and holding securities just does not work in this type of market.

    We believe that is where "trend following" shines. Trend following strategies don't try to predict market or stock movements, instead they capitalizes on the market's movements wherever or whenever they occur. Trend followers respond to what is happening rather than anticipating what might happen.

    So what is a trend? A trend is a strong, sustained move that can last from several days to a number of years. Typically a trend is something we see everyday that translates to continuing price move in the stock markets. An example would be the rising dominance of a country or region of the world that translates into a long and sustained upward move in stocks from that country.

    The goal of the trend follower is to let a new trend develop and then invest with that trend. The trend follower then holds that position until there is a reversal. Trend following is based on the premise that there is always a trend taking shape somewhere in the market. The trend will lead to a strong move higher (or lower) in price. If the investor can identify the trend and jump on board, they will make money.

    The smart trend follower does not invest at the exact bottom because he/she wants confirmation that a turn (reversal) has occurred. Likewise the trend follower will generally not sell at the exact top (which is more easily identified after the fact). They sell after a clearly identified change in trend (reversal). Therefore, the trend follower is able to capture the "meat" of the trend.

    Another very important point is that the trend follower is indifferent as to whether the trend is going up or down to capture his/her long as there is a trend they can make money. This latter statement is very important, the trend follower is agnostic as to the direction of the trend so they can make money or at least protect capital in down markets. This gives the trend following investor an advantage over their peers and improves their financial situation.

    So if you want to improve your financial situation, on a relative or absolute basis, versus your peers, trend following may just be the answer.

    Article Source:
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