1. Markets go up, and markets go down.
Everyone knows that. Just like everyone knows Pinocchio is a bad motivational speaker and Kenny Rodgers is a pain to play cards with. However, when a market starts going down, many reason why it shouldn’t. Unfortunately, unless you’re Bill Clinton, what is, is.
2. It’s always darkest before it gets even darker.
Trends can last much longer and go much farther than most are willing to believe. There’s no such thing as value because a market is low. The NASDAQ seemed pretty cheap back in 2001 when it was down 50%, but then it dropped another 30% from those levels.
On the flip side, there may be no good reason why a market at high levels should continue to climb, even when it does. Logic often doesn’t apply. The bottom line is, if the market is trending, you better be onboard or get out of the way.
3. The only way to profit is to capture a trend.
To make money on a long position, you must sell higher than you buy. I know, yet another “Captain Obvious” statement. However, many fight trends.
4. There’s a beautiful concrete rule when it comes to technical analysis.
If a market is going from A to C, and B is in between, it will have to pass through B on its way to C (see figure). There are no hard-and-fast rules when it comes to fundamentals. Although, trading can be a little more difficult that simply “buying at B” (although I do have a “Buy at B” IPO strategy, which you can review here), you’ll do much better seeking to do just that rather than fighting a trend.
TO GET TO C, PRICE HAS TO PASS THROUGH B
5. Indicators don’t indicate trends, they illustrate.
Indicators are derived from price. Therefore, they are not predictive. They simply illustrate what’s already there in price. Yes, I do occasionally use moving averages with my “Landry Bowtie pattern,” but that just helps to alert me to what price is doing. Always look at price first. Use indicators sparingly and, again, as “illustrators.”
6. You must always start with net net.
Searching for the holy grail, many traders create complex derivatives and, quite often, derivatives of derivatives. Again, what is, is. The bottom line is that when you strip away indicators, all you’re left with is price. And price doesn’t lie. The market is either higher, lower, or about the same as it was.
7. Surprises tend to happen in the direction of the trend.
We’ve been mostly short this year because the market has been headed lower. And so far, the Zika virus, bad earnings, and other negative surprises have helped our positons along. Of course, this isn’t always the case, but surprises do tend to happen in the direction of the trend.
8. They’re not like a bus.
The secret to trading is patience. Great trends don’t come along every day. You print money for a while but go back to grinding it out all too soon. They’re streaky. I was once criticized for using that word in a speech because it made trend trading sound “too elusive.” Unfortunately, it is. And, as I said in my book “The Layman’s Guide to Trading Stocks,” “you must be present to win.”
9. They’re hard to ride.
On his blog, Trend Following, author Michael Covel once equated riding a trend to riding a bouncing bronco. Big contra-trend moves often occur to shake you out, and then the trend promptly resumes. We can actually use this propensity to our advantage—looking to get in after a pullback or, as I describe in my book, a “Trend Knockout.”
10. You can’t predict them, but you can follow them forever.
The future is uncertain. We don’t know when there will be a trend. As trend followers, we wait for one to follow. We don’t know when the trend will end. Again, we just follow along. Although I’m slotted as a swing trader, on every position I hope to stay with a portion of it for at least ten years, hopefully longer.
Dave Landry has been trading the markets since the early 1990s and is the author of three books on trading. He founded Sentive Trading LLC in 1995 and since then has been providing ongoing consulting and education on market technicals. He is a member of the American Association of Professional Technical Analysts and was a registered Commodity Trading Advisor (CTA) from 1995 to 2009. davelandry.com