Why The Trend Is Your Only Friend Right Now
A stock market drop like Tuesday's can send financial writers hunting for colorful vocabulary like "plummet," "meltdown" and my favorite, "smackdown."
By Vikram Rangala
Wednesday, March 11, 2015 - 00:00
Then we try to connect the price change with some current event. You'll recognize it in headlines like "Stocks fall as blank happens" or "Bonds soar on news of blank." The assumption is that the market is trying to give its opinion on the event with its..."freefall."
And then others will speculate on what it will mean if the market continues its...let's go with "avalanche."
"On, as, amid"...the word is rarely "because." That would make for some funny headlines. "Euro rises because Mario Draghi speaks." "Stocks fall because senators grilled Yellen." The fancy term is "correlation without causation."
Correlation means two things happened around the same time. But you can't just put random things together to make a headline: "Stocks struggle as India beats Ireland in Cricket World Cup" or "Bonds soar as Jon Stewart announces retirement from Daily Show."
Obviously, correlation is not causation. Some traders treat everything as correlation. There is a type of trader, usually called trend-follower, who simply doesn't look for the reason the market is going up or down or sideways. Neither do they wonder what the market is trying to tell them about X by going up or down or sideways.
They just know it's going up or down or sideways. Actually, that's all anyone knows. The rest is speculation, or what trend-followers call needless speculation.
What if the market wasn't trying to tell us anything with yesterday's parachute-less skydive? Maybe yesterday's precipitous spelunking didn't really mean anything about the ECB or Greece or ISIL or Ukraine or the FOMC meeting or that gold and white dress that some crazy people think is blue and black.
BEATING THE MARKET AND FINDING THE HOLY GRAIL
Financial writers love to cast the markets as a kind of fight between bulls and bears. Or a smackdown, if you prefer.
It may be a dramatic way to talk about it, but the whole "Beat the market" mindset can bring a lot of needless drama into an investor or trader's life. It's a mindset that says that the game is rigged and to succeed, you have to have some kind of trick. That trick might be an insider newsletter or a "system" or little-known new indicator or a famous (or obscure) trading guru.
Most traders have had a brush with some holy grail, which raised their hopes for a while until they finally had to admit their account balance was only trending one way: down. Looking back, you wonder how you could have fallen for it. And if you're lucky, you learn a great lesson: there is no holy grail of trading. You are the holy grail.
There is a simpler and more obvious way to trade. So simple and obvious, in fact, that people don't often write about it because it's boring.
IF THE TREND IS UP, BE LONG
Believe it or not, that's most of the trend-follower "system." Well technically, it's half the system: if the trend is down, be short.
All right, one-third of the system: if the trend is sideways, be out. Or use a spread. Or trade something like a Nadex binary option, where you can get an all-or-nothing result even with a slight difference between your strike and the actual price.
People say the market is made up of bulls and bears. But in fact there are bulls, bears, and I-don't-cares. The ones who don't care about predicting direction are the trend-followers. Their only goal is to be pointed in the same direction as the market. For them, the only truth is price and it's plain to see on the chart.
Without getting too "Zen" about it, it's the difference between guessing what the market might do later and focusing on what the market is doing now. Trend-followers tend not to think of themselves as long-term or short-term traders. Rather, we think of being with the trend for as long as it continues, and getting in and out without trying to pick the top or bottom.
As an old saying goes, "The trend is your friend until the end, when it bends." The short-term focus of Nadex binaries allows you to think about what the market is doing now, in a limited window of time, and to limit your risk up front. And you don't need to know why the market is doing what it's doing.
Ours is not to question why. Ours is but to sell and buy.
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