Most money is lost in the market fighting the trend and trying to pick tops and bottoms.
There is an old market adage, “The trend is your friend” and it pays well to take heed of it.
Trades that have the highest odds are usually in line with the trend.
We’ll look at some key benefits of trend trading in this article and some key challenges to look out for.
But first, what is a trend and how can we profit from it?
By simple definition, an uptrend is a series of higher highs and higher lows, and a downtrend a series of lower highs and lower lows over a period of time.
For any trend to exist there has to be a net advance/decline of price over time.
Trend trading or trend following is a trading approach that exacts profit by following the trend with no intention to predict and anticipate market movement.
Trend traders buy when the market is going up and sell when the market is going down.
Trend trading is widely adopted methodology in generating returns.
Its appeals are numerous but it also has its fair share of challenges.
Benefits Of Long Term Trend Trading
1. Large profit potential
Most technical analysis is about trend analysis, simply because it is one of the most profitable ways to trade the market.
Some of the notable successful trend followers include:
- Ed Seyokota who turned $5000 into $15M in 12 years
- Richard Dennis who turned $400 into $200M in 10 years
- Michael Marcus who achieved 250,000% in 10 years
- Bruce Kovner who achieved 87% gains per year for 10 straight years
Market has the tendency to move in the line of least resistance.
Once a trader catches a big move and with discipline, he can ride it for an outsized gain.
2. Less time commitment
There is no need to trade every day.
Traders wait patiently for the right market conditions instead of forcing the market.
This is ideal for traders who are not suited for active trading or who cannot afford the time for close monitoring.
Trend trading is a more laid back form of trading and does not demand too much of the traders.
There are less emotional demand and stress in long term trend trading.
3. Cost savings
The less active trading also means lower transaction costs and significantly saves cost over a long period.
Commissions and slippage constitute a large portion of a short-term trader’s gross profit.
This can drastically reduce the profitability of short-term trading.
With trend trading, the transaction cost is minuscule.
Challenges Of Long Term Trend Trading
1. Less Trading Opportunities
Markets do not trend all of the time.
In fact, markets only trend minority of the time, probably at about 30%.
If a trader only exploits trending markets, he will have less trading opportunities.
2. Drawdown during non-trending period
Trend trading strategies suffer whipsaws during non-trending periods.
Traders will suffer drawdown during this period and are not profitably while he waits for a trend to emerge.
Drawdown can be significant since market does not trend most of the time.
There is a lot of waiting in trend trading – waiting for the trend to develop, riding the trend to the end.
There is no performance goal or target.
Traders need to exercise restraint and not predict what market will do or where it will go.
Trend followers buy highs and sell lows.
It is the antithesis of what we are taught in school and society.
We are conditioned to buy things cheap, so buying high or selling low looks absurd.
Unless traders unlearn what they have been taught, trend trading can be psychologically uncomfortable.