Why is price data so important? A recent view offered at a trading conference:
While a technically based or systematic program may be a novel or foreign concept to many investors, it builds on long-established methods of investing. Why? Two questions seem to predominate: First, whether price data really can play a statistically significant role in anticipating and confirming future price movement; second, even if it can, whether one can expect to continue to find and take advantage of such inefficiencies in the future. To deny current or past price activity a role in determining participants’ views of future prices would be to deny human psychology and emotion. There are countless examples of fundamentally-driven equities traders employing technical methods for timing their investments. (Many frustrated value players in Nasdaq stocks in the late-1990s found themselves born-again momentum traders.) For this to breakdown in the future, the market would either have to be taken over by players with precisely the same technical view at every instance or become completely efficient and dominated by coldly rational participants.
The above statement also confirms the concept of zero-sum.
Questions about Trend Following
Q1. I’ve read your website for a few months now and enjoy it, but I’m skeptical of your ability to be different than those you criticize. I’m a trader and interested in learning a new approach but I don’t think the beginning of a trend can be distinguished from a head fake. Of course, money management and discipline are key to playing this game but with slippage and commissions I just don’t see how you can make money consistently. Your articles are all logical and I’ve read many of the books you refer to, but is there anything you can give me which shows Trend Following is different and better?
A1. Different and better than what? Trend Following does not attempt to be a magic solution that allows you to get in early. Doesn’t work that way. The best explanation why it is different is not some quick sounding answer, but rather it involves you digging in and reading through the 100’s of pages at the TurtleTrader site.
Q2. Well, it seems you knock the other types of technical analysis for trying to call a change in a trend or the beginning of a trend, yet I assume Trend Following must also at some point say, this is a trend, get on board. So I’d like confirmation of my assumption and also some delineation of how Trend Following defines trends better.
A2. You can not confirm a trend until after it’s over. You can attempt to ride small movements at the beginning of a breakout (long before you know it is a trend) hoping it will continue. But, those small movements early on may or may not be significant. That’s why you need money management within a complete trading system. That’s the key. Attempting to predict a trend is pointless.
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