Back in the dot com years of the late 1990’s, when all stocks were going up all of the time, I developed my “two-second” trading system, which unbeknownst to me at the time, was the beginning of my passionate affair with trend following.
I published this system as the sole chapter on technical analysis in an otherwise fundamental analysis based book, Confirmatory Analysis-Finding Winning Stocks. In the decade since, only the uncomplicated approach to trading set out in that single chapter and within a few simple rules, has withstood the test of time.
The system in its most basic, yet eloquent composition:
(1) Look at a chart.
(2) Ask yourself one question:
“Do you wish you already owned this stock?”
(3) If yes, it is a BUY; if no, it is a SELL.
In other words and with apologies to Sir Isaac Newton and his First Law of Motion, a stock in motion will tend to stay in motion until that motion ends. The motion is a trend and extrapolating, trends tend to stay trends, until they end.
The “two-second” technique was simple enough, but it required the use of the right side of the brain, the intuitive, “gut-feeling” side of intelligence. As such, it did present a challenge to define the exact rules of engagement. In late 2009, I fixed that by developing an objective, rule-based, mechanical methodology, based on a simple algorithm that identifies the dominant trend of any tradable, thus implementing the two-second analysis in an automated trading system.
This allows for the use of the rational, left side of our brains to follow the subtle but generally accurate directives of the right side of our brains. The results are charts filled with embedded Buy & Sell labels that are always in sync with underlying trends.
But not all trends are equal. Some last years, others last months, or weeks and sometimes, just days. Diversify enough and those positions in intermediate and longer-term trends will generate enough returns to carry all of the laggards, which by definition are strictly limited in losses because prices cannot go too far against the dominant trend without the underlying trend reversing. In the sage old adage of Wall Street, the system lets profits run while cutting losses short. Automatically.
In over 25 years of trading, my mantra for success in trading has been refined to this central principle:
FIND SOMETHING THAT WORKS. THEN TRADE IT.
Understand that these are two separate tasks. The first, “Find something that works,” may be the easier of the two. Trading is a deeply psychological game and just having the right trading idea is sometimes not enough. “Then trade it,” is harder than it sounds. Gaining enough confidence to actually take a trade is a separate proposition altogether. It’s the, “Should have, would have, could have,” syndrome where all of our best trades are often left on the table for a myriad of reasons, none of which make any sense in retrospect.
Enter this objective, no questions asked, trading system and both elements of the above proposition are met, i.e. we have found something that works and it is eminently tradable.
Throughout this site you will see charts with Buy & Sell signals. These signals are all based on prices entering and exiting trends. Look at enough of these charts and the theme and proficiency of trend following, as defined by these trading models, will become evident. Either you see and understand how this works, or you don’t. If you do, then this approach to trading and investing may be well suited to your trading and/or investing needs.
Although there are other ways to define and/or identify trends, this one comes closest to my original “two-second” test. It is simple, easy to follow and removes much of the angst out of trading and investment decisions. It is not the holy grail, it is not for everyone and it is far removed from the gambling, high-roller, picking tops and bottoms action that some crave.
But it is something that works.
All that’s left to do is to trade it.