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Trend & Position Trading


"...when I was designing what turned out to be a trend following system...[that] approach – a mechanical and mathematical system - has not really changed at all. Yet the system continues to be successful today, even though there has been virtually no change to it over the last 18 years."
John W. Henry

The Trading Plan Components

What is the difference between trend trading winners and losers?
. Does this mean that there are traders without a plan who occasionally win? Yes. But eventually, just like in a Casino, plan less traders eventually give up their gains to the house. If you are armed with strategy you will keep the profits.

The world will always face constant change and no one can forecast a trend’s beginning or end until it becomes a matter of record, just like the weather. But if you have a basic strategy that's sound, you can take advantage of those changes to make money by capturing the bulk of a trend

The components of a Trend Trading Plan consist of:

Price: The first concepts that trend traders must learn is that "price" is a trader’s only concern. If a market is at 45 and goes to 48,49 and 50 - the market is in a up trend. If the market is at 50 and goes to 48, 46 and 42 - the market is down. Despite what every news commentator "predicts", if the trend is up, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trend trader need only be concerned with what the market is doing, not what the market might do.

Money Management: The only goal of a trader is to capture the majority of a price change or trend. Trend followers don’t pick tops or bottoms. If the market is going down, you sell. If the market goes up, you buy. You can never buy a market too high or sell a market too low. The most critical factor of trend following trading is not the timing of the trade or the indicator, but rather the determination of how much to trade over the course of the trend.

Risk Control: You must have a system of risk control. During periods of higher market volatility, trading size is reduced. During losing periods, positions are reduced and trade size is cut back. Your chief objective is to preserve capital until more favorable price trends reappear. Your system must determine:

  • When to enter the market.
  • How many shares to trade.
  • How much money to risk on each trade.
  • When to exit the trade if it becomes profitable.
  • When to exit the trade if it becomes unprofitable.

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