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Wrong Understanding of Trend Following Trading

A reader writes to “summarize” trend following trading:

Let me summarize the idea of Trend Following:
1. Wait for a trend to develop, either up or down.
2. Buy/sell short.
3. Hold and hope that someone is dumb enough to purchase/sell AFTER you.
4. Sell before the crowd.
Gee whiz – Trend following sure is easy! Do you see how STUPID this form of investing is?

Our feedback:

1. Trend following is not investing. It is trading. For clarification of the investing/trading debate:

a. Read here.

b. Some words from Richard E. Cripps, CFA Chief Market Strategist:

Importantly, Covel makes the case that investors are likely to benefit from having a portion of their portfolio invested in a non-traditional approach that adapts to whatever stock or asset class is exhibiting definable trends. While this “trader” mentality may strike some as inappropriate, this approach is becoming modus operandi for some of the most sophisticated and successful long-term investors.

c. Read pages 5-6 of Trend Following book.

2. Trend following trading is one of many trading strategies. People buy and sell for many different reasons in the zero sum game. Hedgers, who often provide profits to trend followers, are not dumb. Hedgers take actions akin to buying insurance. When the big trends happen, trend followers “collect” the premium paid by hedgers in the market. Both sides get what they want. For more information read here.

3. Trend followers do not “sell before the crowd” whatever that means exactly. For more information on how trend followers never enter at the exact bottom or exit at the exact top, read pages 230-231 of the book Trend Following.

4. We guess if being “stupid” meant making the millions that John W. Henry, Paul Rabar, David Harding, Larry Hite, Ken Tropin, Jerry Parker, Salem Abraham, Keith Campbell, etc. have all made — then there are probably millions of people who wish they could be SO stupid.

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