4 essentials to capitalise on a trend

Buying into a booming property market … selling bikes in a global pandemic … capitalizing on a trend looks like it should be the easiest money to take. Yet it’s a trading method filled with potential pitfalls.

Ensure you know what you’re doing …

1. Don’t be binary

Trends aren’t just up or down. They can also be sideways.

But there’s more … they can also be weak and hard to distinguish.

Don’t assume you’ll always be able to gauge trade direction. Sometimes markets are directionless or skittish and are best kept out of.

Don’t be afraid to sit out of the markets if there’s no obvious bullish or bearish bias.

If you don’t feel confident judging the strength of a trend, this little tool can help …

It’s the ADX, or average directional index. The black line is a measure of trend strength. The default reading of it is that any level above 20 constitutes a directional trend, while below 20 indicates a lack of direction.

2. Wait – time your entry

The overwhelming urge when we see a trend and want to take advantage of it, is to jump in before we miss more of the move.

But, as we know, markets don’t move in straight lines, and jumping in just after a surge can leave us vulnerable to the following pullback. As any trend trader knows, it’s surprisingly easy to lose money in a trending market, despite being in the direction of the long-term trend.

If you bought into this trend at A or B, for example, it could be weeks or months before you saw a profit.

It’s incredibly important to use pullbacks, combined with momentum indicators, to time your entry into any trend. It’s not enough to just sit back and assume you’re buying into a rising market.

3. Be ambitious

Despite what your head is telling you … that the signal is now overbought … that you shouldn’t be greedy … that ‘pundits’ are calling it a bubble … you need to be ambitious with your targets.

It is the nature of trends that indicators will get stuck into overbought/oversold territory, and that people on the sidelines will start screaming about bubbles. Even short-term trends can often run significantly further than ‘good sense’ or value would suggest that they should.

The profits to be made from trend-following depend on taking full advantage of this fact. We need to stick with trends for the long-haul. Without these big wins, we won’t survive the often brutal success rate that trend traders face … which brings me to the subject of losing trades …

4. Accept losers

It’s the nature of trend trading that we tend to be reliant on lagging, trend-pointing indicators which can often give false or ‘too late’ signals. This doesn’t mean there’s anything wrong with our signals – it’s just the nature of the beast and we need to know how to handle it.

The trick is to cut those losses quickly and (as we’ve seen), let the winners run. Don’t hang in there waiting for trends to ‘come good’ – just accept a small loss and be prepared to try again … and again. Because the thing that’s certain about trend trading is that the trends WILL come, and when they do, they can be substantial!

Reaping the rewards

So, while trend-following looks like it should be the easiest way to make money, it’s vital to know when to enter, when to exit – and when to sit on your hands…

The rewards on offer are substantial, but sometimes we have to be patient.

Of course, I’ve diligently applied all this wisdom to my lockdown bike-buying plan. I’ve waited and waited for the perfect moment (not jumping out of fear that supply will dry up) … and STILL haven’t taken the plunge. Although I am now circling in on my target, so should be ready for the summer season with my new wheels.

 

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