Trend following involves identifying the market’s direction and making trades that follow it, resulting in decreased risk and the ability to buy and sell quickly. Price is the first indicator to consider, followed by the number of shares to buy or sell. Risk control is essential, and investors must know when to enter and exit the market.
In investment circles, trend following is the process of identifying the prevailing direction of the market and making trades that follow that direction. Proponents of this approach find that this strategy of following the current market trend results in decreased risk, while allowing investors to buy and sell quickly to take advantage of the current direction of the market. The idea of following trends is relatively simple compared to other investing strategies, and is employed by both experienced investors and those new to the world of investing.
There are several indicators or factors that need to be considered in order to apply a trend following approach. The price is normally the first indicator that the investor will approach. By correctly identifying the trend in relation to the unit price of the shares, the investor can get an idea of whether the value of the shares is currently rising, or is showing signs of slowing down just before listing or possibly experiencing a recession. . This single factor can help an investor determine whether it is a good idea to consider buying stock or focusing elsewhere.
Assuming that the current price movement is favourable, the investor will want to consider how many shares to buy or sell. This factor will often be influenced by the investor’s financial objectives and their desire to dedicate a particular amount of available assets to an investment. With trend following, this often involves projecting performance as long as the current trend continues, and deciding whether the performance is enough to warrant buying a larger number of shares, or going with a relatively small number of shares.
As with any investment strategy, the trend following process must be tempered with some form of risk control strategy. The idea here is to generate the most income while following the trend, but be ready to make changes when the current trend starts to decline. By anticipating the downward movement of the trend, it is possible to minimize the potential of incurring losses. Even if the trend indicates a temporary decline followed by a rally, the investor may choose to reduce the number of shares held just before the decline. This approach helps keep the overall loss within reason while also being in a position to make bigger profits when the stock starts to rise in value once again.
Trend following requires the investor to understand how to read the trend and then act accordingly. To this end, the investor must know when to enter the market and how many shares to buy or sell. The investor must also know how to properly determine the amount of risk he is willing to take on any investment and when to break out of the trend at just the right time to get the most profit. Taking all these factors into account makes it possible to follow the current trend and considerably increase the value of the portfolio.
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