The Trend is Your Friend

“The trend is your friend”

The origins of this trading maxim are a little hazy but scores of successful trading schemes have grown from these roots. The highly successful US trader Ed Seykota is the source of many wise words on trading and he completes this saying with

“ … except at the end where it bends”.

This summarises the simple message of trend trading – but the complexity comes in determining when the trend has started and finished.

The basis of trend trading is in Dow theory. Charles Dow was one of the pioneers in technical trading and described how a stock price chart can be seen as a succession of peaks and troughs. He defined an uptrend when a chart was showing a series of higher highs and higher lows and a downtrend when a series of lower highs and lower lows were being established. The uptrend breaks when the stock price moves below a previous higher low. Slack Investor makes use of this trend finish signal as an exit for the index trades shown on the ASX Index, UK Index and US Index pages. There is a refinement to this simple strategy and the Slack Investor will exit an index trade only when the closing price is below a stop loss set by a previous higher low. This refinement helps to screen out any short term price lows that might occur during trading.

Ed Seykota has also has stated that

“Trends become more apparent as you step further away from the chart”

These wise words echo the Slack Investor strategy of trading the long term trends – by analysing trends on weekly or monthly charts.