My Approach

I follow Trends in the market.  First, let’s talk about what following trends means and what following trends does not mean.

Following Trends by definition is an investment strategy that takes advantage of long-term positive and negative moves that play out in the financial markets. A trend following strategy will have a particular metric or a series of metrics that trigger buying and / or selling. I do not attempt to guess the direction of the market. For me, the goal of following trends, is to be invested in the positive trends in the market and sitting out of the negative trends in the market.

Trend following is not a buy and hold strategy nor is it market timing.

Buy and Hold is an investment strategy that is exactly as it sounds you buy an asset and hold through ups and downs in the market. Recent history late 1990’s through the present has shown that long stretches of time can go by and your portfolio can rise and fall many times only to leave you in the same place you started many years before. Buy and hold should be seriously reconsidered.

Market Timing is defined by the website investorwords.com as “Attempting to predict future market directions, usually by examining recent price and volume data or economic data, and investing based on those predictions.”

What is the benefit of following trends?

The single biggest mistake the average investor and professional investors make is letting emotion get involved in the investing process. A trend following investment strategy removes emotion and the urge to time the market and puts in its place a disciplined set of metrics for buying and selling. The metrics answer the following questions all investors share:

  • How and when to enter the market
  • How much to buy
  • When to exit if the position is unprofitable
  • When to exit if the position is profitable

The second benefit is being out of the market for most if not all of down market trends. Most investors look to get as much of the upside of the market as possible. Why? The media and the financial services industry have conditioned the public and itself that beating the broad market indexes is paramount. While it is nice to beat the broad market indexes in the good years it is more important to not lose as much in the bad years.

Basic Trading Strategy

The main focus of my trading strategy is the 50 and 200 day exponential moving averages (EMA).  The moving averages are strong technical indicators about the direction of an ETF.  There are two types of moving averages exponential (EMA) and simple (SMA).  The difference is that EMA gives more weight to recent movements in prices and this is why we use EMA.

The 50 day EMA is the shot across the bow that gets my attention and the 200 day EMA is the actionable event.  Basic trading rules:

  • An investment crossing below its 50 day EMA should be watched closely and maybe warrants a reduced position depending on fundamental analysis
  • An investment crossing below its 200 day EMA should be sold
  • An investment crossing above its 50 day moving average should be watched closely and maybe warrants a partial investment depending on fundamental analysis
  • An investment crossing above its 200 day EMA is set for buying
  • Maintain trailing stop losses within your comfort level