The concept of trend following trading is not predicated on fundamentals, prediction or staying glued to the news. The price action, the momentum, the supply and demand, those are what trend followers are trading in up and down markets. If any fundamental does have an impact, from a trend following point of view, it would be built into the price action. Bloomberg, CNBC, the brokers and their never-ending analysis – that stuff is pure entertainment.
For me, trend following is all about catching the middle of a big trend, whether it be over a long, short or medium term: it’s thinking about getting into any market while the price is going in one direction, and exiting as soon as it starts to turn the other way. No guessing or prediction. This is about following systematic rules for entry, exit and position sizing.
First, a momentum signal to get into a trend is decided on, and then that same signal is used to get out on the trend reversal, whether that’s a moving average or breakout; it’s simply about a trigger that shows the price is moving higher or lower, that determines whether to be long or short.
In trend following, nothing else should have an influence on trading: the indicator used should only be based on the price action, not some tip or breaking news on the famed finance channels or competing voices across Twitter.
“The indicator used should only be based on the price action, not some tip or breaking news you hear on the famed finance channels”
Trend following aims to capture the middle, or the meat, of a market trend; up or down. Trend followers do not get in at the absolute bottom or get out at the absolute top. That means stocks, ETFs, options, bonds, currencies, futures, and commodities can be traded – as long as it’s via the price.
Michael Covel is the author of Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets and The Complete Turtletrader: How 23 Novice Investors Became Overnight Millionaires. He also created and hosts the ‘Trend Following Radio’ podcast.