The Trend is Your Friend
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Finance > Investing
Apr 18, 2007
The Trend is Your Friend
We traders have to try to achieve a state of impartiality. We have to accept that we will have losses as readily as we will gains. Reaching a stage where you can comfortably accept losses, in the knowledge that your method of trading will produce profits in the longer term, is the state we have to aspire to. Trading is not an exact science. No matter what anyone tells you, trading is not, nor has it ever been, an exact science. Trading is an art. To date there has never been an institution or individual who can guarantee you will beat the market every time you trade. Just think about it, if anyone one had an exact method that always won, they would have all the money in the world, given enough time. Lets discus this a little further. Most of the charts we will be looking at are day charts; that is to say if you are looking at one bar, that encapsulates everything that happened during that day. It would have a high for the day, a low for the day, an open for the day and a close. If you were looking at a chart made up of 4-hour bars there would be twice as many bars. Each bar would have it's own open, high, low and close (OHLC). These may be different from the day OHLC bar as the bar is measuring all the price changes inside that particular time period, in this example, 4 hours. The same can be said for any other time period whether it is 30 minutes or 1 minute e.g. it would take five 1-minute bars to make up one 5-minute bar. This is why it's impossible for someone to tell where the trend is in a particular security unless he knows what time period you are trading. It is also why if you were looking at a daily bar and noted that the bar closed at e.g. 500 it does not tell you what happened during the day. If you where trading 5 minute bars you might have watched it rise most of the day and made money only to see it close much lower later in the day. For the sake of simplicity I recommend you start with daily bars only for the first few months. This will give you plenty of time to make your analysis and plan for the next day's trade. I often see people with little or no experience trying to trade 1 minute bars only to find the decision making process is far too much for them as they have to make decisions every minute. Also worth noting is that there is no one time period that makes more money than another. The reason you would trade a weekly bar as opposed to a 5-minute is purely a matter of choice and circumstance. One of the secrets of trading is to trade in the time period you feel comfortable in. It is also a function of time and money. The price chart of a security may appear like a random distribution, but this is not so. About 30% of the time a security will be in a definite trend. The rest of the time prices will trade more or less in a side ways range. Our job is to recognize trends early, as they emerge from non-trends or as reversals of prior trends. We then buy/sell our security early in these new trends and exit the trade profitably when the trend ends. This identification of trend, its beginning and end, is the most important thing we have to do. This is how great fortunes are made.
Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.
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