Not Trend Following But Trend Investing
There is Trend Following and there is Trend Investing. There are similarities and there are differences. Sometimes one is better and sometimes the other one is more feasible.
In general Trend Following the financial markets has the following characteristics:
- Systematic trading system based on (long-term) price action
- Risking small percentages of capital in each trade (especially when Futures are used as instrument) and using stop-losses
- More small losing trades than big winning trades
- Trading many markets, from equities to bonds to commodities and currencies.
Trend Following Reduced
Trend Investing is a reduced form of Trend Following. Trend Following is very much for the professional money and hedge fund manager and traders. One aspect makes Trend Following less suitable for the private investor. That aspect is to trade many markets.
To trade many markets, you need the tools, capital and time to do so.
Maybe as a private investor you can buy the automatic trading tools that allow you to enter rules for entry and stop-loss trades. Maybe these systems can place your orders automatically to the markets.
But even with these systems, you still need sufficient capital to make the trades worthwhile in the long-run. You need sufficient capital to bet large enough in the many different markets to make the few big gains pay for the costs of placing the many trades.
And even when you have the tools and the capital, you need the mindset to be able to trade markets without having the time or mental space to follow the price action in these markets.
Trend Investing for Your Own Money
Many private investors do not have the tools, capital and time to Trend Follow many markets. The Trend Investing approach provides a feasible alternative based on similar principles for these individuals.
Here are the main differences:
- Trend Investing focuses only on indices in the equity markets and gold, not on all other financial markets.
- Private investors often do not use highly leveraged trading instruments like Futures but invest in e.g. Index Funds. When using Index Funds, different capital allocation and risks apply then when trading Futures.
- Trend Investors manage their risk by diversifying between different investing approaches and asset classes. They apply Trend Investing to only the part of their available capital that is invested in Equities and Gold. For the part of their capital that is allocated to bonds, high dividend stocks and cash, they do not use Trend Investing.
If you have the capital, time, mindset and tools, it is probably wise to ensure that for a part of your capital the Trend Following approach is applied.
If you manage your own money and do not have the tools, capital, time and mindset to go full-scale Trend Following, consider using Trend Investing for a part of your capital.