What’s the difference between trading and Christmas shopping?

What’s the difference between trading and Christmas shopping?

Don’t worry. This isn’t the beginning of a bad cracker joke.

Last weekend, Mrs Trader’s Bulletin came home laden down with shopping bags. And as she unpacked the “they were on a 3 for 2 special offer” toys … the “absolute bargain – I couldn’t pass it up” clothes … and the “I saved loads of money on these” useless gadgets … I was tasked with the job of hiding them in the loft before the kids saw them.

I’m wise enough to know that I shouldn’t knock my wife as a consumer. If I did, I might just end up getting lumped with the chore of Christmas shopping.

But I am aware that many traders see themselves as “consumers”. They look at the markets like a giant supermarket, and hunt out bargains and “deals”. Unfortunately, when traders think like shoppers, they often make unwise decisions.

Juggling with knives

It’s the desire to “buy cheap” that leads traders to believe that they can buy at the bottom of the market and sell at the top. Of course, buying a the bottom and selling at the top is a nice job if you can get it – but picking those “bottoms” and “tops” is notoriously difficult – and has been the downfall of many a contrarian investor.

Recent market volatility has led many investors to hunt out quality companies in continental Europe at depressed prices, but the question remains: “Why should I buy these shares now when I’ll probably be able to buy them cheaper next week?”

It trading terms, it’s referred to as “catching a falling knife”.

This kind of contrarian approach to trading is about being prepared to stick your neck out on an opportunity. In investing – it’s the exception, rather than the rule.

The rule, for day-to-day trading is – I’m sorry to say – less exciting.

We don’t fight the herd – we wait for it to move – and we follow it.

Trend following for day traders

Trend following is one of the oldest and most established technical systems. We wait for a trend to be established, foregoing a good slice of profit for the comfort of knowing that the trend is established. Then we ride some of that move.

It has traditionally worked well for long-term trading strategies, but its value can sometimes be lost on day traders, who get so bogged down in the machinations of 5-minute charts that they lose sight of the bigger picture.

For day traders to apply trend-following, they simply need to favour trading opportunities that are in the direction of the longer-term trend.

This doesn’t mean that you can’t profit from the choppy ups and downs of volatile markets – simply that you’re giving priority to trend-following trades.

If you’re trading on a 15-minute chart, then be aware of the trend on the daily chart, and give preference to trades in the direction of that trend.

Isn’t trend-following dead?

The lament I’ve heard again and again from traders this year is: What trend?

It’s all very well to advise traders to follow a trend, but what can you do if there don’t seem to be any trends?

In recent months, the market has been defined by a series of short-term and violent trends, which means that the trend is over before it’s even registered on the trend-follower’s radar.

We only have to look at the big trend-following hedge funds, which have recorded a very difficult year to know that we’re not alone in struggling to identify consistent trends in the markets.

So, how do we follow trends in the current market conditions?

One way is to narrow down our timeframes.

If you’ve been looking for a trend on a daily chart – try looking on a 4-hour chart instead, or even on an hourly chart.

There’s no doubt that trends in current markets are pretty fickle, but they are still there. And a simple adjustment to your trading strategy that tips the balance in favour of a trend, can improve your chances of success.

Related posts:

Trading the holidays – how to avoid Christmas regrets The truth about summer trading … and autumn trading …