Does trend following work on stocks?
As a globally renowned trend follower for over 35 years, I am often asked if trend following works on stocks. The answer is an unequivocal yes. Despite some analysts and traders labelling trend following as outdated or unreliable. The fact is that it can be incredibly effective when applied to the stock market.
The reason why trend following works so well for stocks is that it allows traders to avoid short-term noise. Instead focus on the long-term direction of a stock’s price movement. In other words, it enables traders to identify the major trends. Both up and down, and to ride those trends for optimal profits.
With trend following, traders look for basic patterns in prices and then try to profit from those patterns. They use a variety of tools, including moving averages, to analyse the market and make informed trading decisions. By analysing the trends in prices over time, trend followers can identify patterns that signal a trend reversal, and then take action based on those signals.
One of the key advantages of trend following on stocks is that it allows traders to take advantage of the market’s inefficiencies. The stock market is particularly notorious for its inefficiencies, which stem from a variety of factors, including investor sentiment, company news, and broader economic trends. These inefficiencies can give traders an opportunity to profit from sharpened analytical skills and a deep understanding of market trends.
Another advantage of trend following on stocks is its ability to exploit momentum. By identifying stocks that are trending in a particular direction, traders can enter into those trades with high confidence, and then ride the momentum until it changes. This allows for quick profits and a rapid turnover of trades.
However, it is worth noting that not all trend following strategies work equally well on stocks. Some strategies may work better in certain market conditions, while others may be more effective in different market environments.
Furthermore, trend following does not guarantee profits, and there is always a risk of losing money on any trade. Traders who use trend following do so with the understanding that they will not always be right, and that losses are an inevitable part of the trading process.
In summary, trend following does work on stocks. It can be extremely effective when applied with discipline and patience. It can be an excellent strategy for traders looking to capture major trends in the stock market. However, traders should be prepared for losses and understand that there is no guarantee of success. By making informed trades and sticking to their strategy, traders can maximise their chances of success while minimising their risk of loss.
