Introduction Chapter

What is trend trading?

Trend trading is a trading strategy that tries to take advantage of the up and down trends of securities. Trend traders typically try to use technical and fundamental analysis to identify trends as early as possible so that they can profit from them. The trends can be short to long term trends depending on the trader’s preferences and objectives.

Does trend trading work?

 “Buy and hold” investing strategy does not seem to work well over the past 15 years. A “buy and hold” investor of the S&P500 index will incur a 7% loss from end of 1997 to 2008 while a trader that follows the major trends will make about 560% return or about 19% annual return during the same period!


 

Figure 1-1: S&P 500 Index chart

As you can see from the Figure 1-1, the S&P 500 index had undergone two major bull and bear markets from 1997 to 2008. In our example, the long term investor who bought the index in 1997 will only breakeven in 2009!

However, assuming if you are to carry out the trend following trades during this period as described in Figure 1-2, your $10,000 will turn into $66,350 compared to $9400 if you are to employ “buy and hold” strategy. That is equivalent to multiplying your money more than 5.6 times or almost 19% per annum! Of course, you might not be able to time the tops and bottoms so accurately, but if you master trend trading, you will definitely perform much better than just employing a “buy-and-hold” strategy in this instance.

Entry Date

Index

Order

Return1

Exit Value

31 Dec 1997

970.43

Buy

57.4%

$15,700

24 Mar 2000

1527.46

Short Sell

49.1%

$23,410

9 Oct 2002

776.76

Buy

99.9%

$46,790

19 Jul 2007

1553.08

Short Sell

41.8%

$66,350

31 Dec 20082

903.25

Close Short

NA

 

1: Content in table above excludes dividends earned or paid, so actual returns most likely will be higher.
2. Exit on 31 Dec 2008 for 19 Jul 07 short sell order is used for simplicity, if you hold till 9 Mar 2009 when S&P 500 is at 676, you would have made more.

Figure 1-2: Returns from trend trading S&P 500 Index from 31 Dec 1997 to 31 Dec 2008

You might think 19% annual return is not exciting but if you compound 19% over a period of 30 years, your $10,000 will grow to $1.85 million in 30 years time! That is 185 times your initial capital! A record that even Warren Buffet will be proud of. And this is just the S&P 500 index!

Contrary to popular belief, Warren Buffet is not just a “buy and hold” investor. Buffet started out as perhaps one of the most sophisticated securities trader and hedge fund manager in the world. For example he practiced highly sophisticated arbitrage trading. Buffet did mention that he kept his personal investments and trading apart from Berkshire. One of the key reasons Buffet held a large part of Berkshire’s investments for a long time in the later part of his career is because Berkshire owns huge stakes in its portfolio companies and it simply cannot trade their shares in the markets like most of us do.

Hence, whatever your trading or investment philosophy is, trend trading is an important and powerful tool that you should include in your repertoire of skills.

 Objectives of this book

This book is meant to be a guide to help you succeed in making consistent profits from trend trading regardless of the direction of the market. But to be successful trend trading, you need pre-requisite knowledge and skills. But I understand that you have limited time to learn those knowledge and skills.

Hence, this a straightforward guide book that aims to help you learn trend trading quickly by providing you with step-by-step guide that will enable you to:

  • Learn the basics of trend trading;
  • Set up a trend trading system;
  • Improve technical analysis or fundamental analysis skills;
  • Improve your trading techniques, system or results; and
  • Start trend trading with minimal prior knowledge.

To help you achieve these objectives, this book will describe 7 simple steps that you can complete within 3 days of diligent work. There is an Action List at the end of each step for you to complete. Under each task in the Action List, there may be tips and guides to help you complete each task.

If you are new to trend trading and you really want to be a successful trend trading, you should complete the tasks in all the Action Lists. For those who are experienced trend traders, you may go to the sections that interest you.

If you diligently complete the actions required in the Action Lists and master the important lessons in this book, you will be a very successful trader of stocks, Exchange Traded Funds (“ETFs”) and even foreign exchange (or “forex” for short).

However, your trend trading education should not end here. You need to reference other books or even visit our website to further improve your trading knowledge and skills.

Seven Fast and Simple Steps to Trend Trading Success

The seven steps that are described in this book should help new traders master the basics of trend trading quickly and easily. Hence, I suggest that you go through these steps in chronological order.

The seven steps to help you master trend trading basics are:

1.      Resolve to increase your wealth from trading

 

2.      Understand your risk appetite and personality

 

3.      Increase your awareness of trading opportunities

 

4.      Learn technical and fundamental analysis

 

5.      Master different order types

 

6.      Develop your trend trading strategy and system

 

7.      Review and fine tune your goals and system

No one can guarantee that you will make money in every trade, as that is simply impossible. Even great investors and traders such as Warren Buffet make mistakes in some of their trades and investments. Hence, don’t be discouraged if some of your trades are unsuccessful.

With a proper trend trading system that you will learn to build here, you will be able to use your mistakes to help you improve your system and increase your future trading profits! A trader with a good system will definitely be more successful than the trader without one.

Let the Journey Begin

Enough said, as I want to make this book a fast and simple read.

Do try to take notes and carry out the actions required of you in the Action Lists. You can visit www.trendtradingsignalsystem.com for more resources, trading tips and some sample templates for the tasks in the Action Lists.

Good luck and enjoy the journey!