Follow The Trend

I dont trade oil directly, although it has an effect on all of our lives, whether this be the price of fuel, or the cost of food in the shops (higher transportation costs). I think that the oil price will have another run soon, as the Middle East situation is getting worse. It just takes one of the big Middle East countries to stand up against America, and we have big problems. Middle East against the West - the "warm" war?

I dont really think that a successful trader can have a conscience. The best traders seem to deal on cold hard information, and not have "favourite" areas of investment. Take "Black Monday" in the UK, when George Soros took on the Bank of England and won. He knew that the facts did not stack up with the reality and gambled on a change in policy by the UK Government. He was right, and he made a fortune......... He dealt on cold hard information, with no guilt about what he was taking away from the Bank of England. A real Trader!!!

Wow, my averaging down comment has prompted a barrage of advice!!! While I have used averaging down on some occassions, it is not common place in my most popular trading strategies. I am more a trend man, unless I see some extremely good "value" in a stock, and feel the fall has been over done. These type of positions tend to be more longer term, although on the odd occassion they can bounce in the short term.

I am driven by the fear of failure, which I think lurks deep in the mind of any trader. Traders are winners by nature, and do not like to come second. The competitive nature of investing is what shapes Traders, what gives them the will to succeed, and pushes them to the limit. Add in the fear factor, and you have a very very potent mix.

Some nice comments Soultrader. Have you ever tried averaging down on the way down? In the past I have put aside an amount of money for a particular investment, and bought on the way down, e.g. invest 25% initially, then 25% lower down, etc. This has allowed me to average my entry price on the way down. The idea behind this technique is simple - I will never find the bottom, but if I can invest a % of funds at what I believe to be good value prices on the way down, then I should end up with a decent average price. It is human nature to have a knee jerk reaction to bad news, and this can open up great buying opportunities. If only I had tried this technique more often than investing all funds in one go, when trying to "catch that falling knife"!

This is one of the best stockmarket sayings I have come across, and has made me some good money over the years. I have traded many stocks ahead of Company results, after signs of strength in the weeks running up to the figures. In the UK, there tends to be anything upwards of 6 weeks between a company closing there books, and announcing results to the market. I have seen many occassions where shares have moved upwards as the "insiders" gain prioir knowledge of impending results. I find it best to get in early for the ride, and sell just before, or when, the results are announced. After a good run, we have all seen many shares encounter profit taking when the results / news is announced, hence :- Its better to travel than arrive..........

Is this not just an example of markets being over bought and over sold, but just over a very very short timescale? Maybe you could incorporate an RSI (Relative Strength Index) into your new theory? Then maybe compare the market movement, to the trend / shifts in the other major worldwide markets?

I think that you need to put together a small Prospectus type document to be taken seriously by any potential investor. Like Soultrader said, you need to be very careful how you market yourself, to ensure that you give the right impression. A well presented, good investment opportunity will always attract attention, although you could have the best idea in the world, not present it correctly, and nobody will take any interest.

When you are Trading, do you use a Stop Loss Limit or do you set a Target Price? I must admit that I tend to set myself a Target Price, but seem to constantly change this, and more often than not, I end up bailing out on the way down (and hopefully retaining some / all of my profit). It has to be stop-loss for me.............the fear of losing my capital is often the reason why I sell an investment.

Chasing the quick buck is a recipe for disaster - if it is there, take it with both hands, but dont go chasing it!! Traders dont "chase" the quick buck, they just put themselves in a position to take advantage if it does arrive. A good trader may have his favourite stocks but an expert trader will have no favourites - thats is what makes the expert traders very rich. A LACK OF EMOTION, A COLD CALCULATED APPROACH TO EVERYTHING.

Playing Poker and Trading Stocks requires a similar kind of mentatility, and the ability to hold your nerve in difficult situations. A good Poker player could easily become a good Trader, if they have an interest in the markets, as the skills are transferable. If you think about it, Poker players play Poker because they are attracted by the game, this is still the same with the Stockmarket and Traders.

Diversification is a useful tool for long term investors, as this basically aligns your investments to a particular market(s) movement. There are many articles about diversification, although in summary you need to spread your investments between different "beta" stocks. Some stocks move in line with the market, some in the opposite direction. There are calculations you can carry-put to see how well you are aligned to a certain market(s), but your portfolio will need constant adjustments. One problem with diversification is the fact it is based on historical stock volatility data, and this data is changing constantly. I think the subject of stock "betas" is a good subject for another Thread...............

I have dabbled in Futures and Traded options, but do not feel 100% comfortable with them. I would not have the confidence to trade in decent size on the Futures and Options markets. With my current knowledge of Futures and Options I feel the risk / reward ration is not in my favour. I do however feel a lot more confident buying stocks and would think nothing of opening a large position in a stock I was confident about. Maybe I should take a closer look at Futures and Options............

To me the entry point is far more important than the exit point - as they say :- "You need to buy a ticket to win the raffle" If you have not taken the plunge to buy a stock, then how can you make money? Even if I make 5%, 10%, 50% etc and miss a massive rally after selling, I would not be too bothered......a profit is a profit.

Hi Soultrader I think you are right in many ways about amateurs having a big impact on the opening. How many times do we see stocks marked up before the official open, on good news, and early buying from "private investors". After the early buying has slowed, many stocks seem to go into reverse and encounter "profit taking". Then later in the day it often emergers that an institution has been dripping feeding stock out, to fill buying demand.

I agree, Rogue Trader was a bit of a let down for me, with what should have been a brilliant storyline. Im not sure if they were afraid of being sued if they made it too realistic, but it did nt quite catch the imagination. My favourite stockmarket character of all time was Gordon Geko - the devil in disguise!!!!

In my opinion $1000 is no where near enough to start trading, especially on the FX market. While you might make a few $ with a couple of successful trades, it only takes one big loss to wipe out your entire capital. The most successful traders take small "turns" frequently, on large amounts of capital. The costs associated with trading $1000 would make it uneconomical in my view.

There are some very good points in this article, and all valid in my opinion. The best traders in the world do not act on human emotion, they are able to take emotion out of their trading and act on facts and figures alone. In the traders world, to show emotion is to show weakness, and any weakness will be exploited by others.

Ezduzzit You have brought up a very interesting subject i.e. the use of software to spot trends, trading signals, etc. This type of investment strategy can be self feeding, in that if enough major players in the market are using a particular software program, there is the potential for a big herd to chase a stock higher. The downside to this type of trading is when the trend turns - if you are not quick enough, there is a big danger of being left behind, and seeing any profit reduce or disappear.

Many of you will be aware of the trading phrase "catching a falling knife" - i.e. trying to guess the bottom of a falling share price trend. While this is something which I know is very dangerous, I have gone against my better judgement on a number of occassions and tried to call the bottom of a share price - with very little success. I have had much more success spotting the first signs of the trend turning up. Which approach do you take?

While there are a lot of good comments above, I am not sure it is really as straight forward as some think. I agree that the first stock price of the day reflects the perceived demand for the stock at the open, and perhaps a little bit of completing orders from the day before. However, it is a little simplistic to say that the closing price is so predictable, because there are many factors to consider. A lot can happen to the momentum of a stock from start to close.

I know that this might sound a little corny, but I still think that "Wall Street" is the best Stockmarket film of all time. It perfectly reflected the 1980s era or power and greed, and we all know that the characters in the film were "based" on "traders" of that period. I could watch that film over and over again. What is your favourite?

I dont fully understand the question, but a stockmarket "run" tends to be a period when the consensus view is positive. This can create a momentum and generally push stock prices higher. If you spot a "run" early, a good trader can use it to their advantage and ride the momentum, until they feel it is starting to weaken.

While many people feel that the oil price may have peaked, I for one do not agree. There are a number of factors to consider :- There are still major issues in the middle east We are entering the winter period when oil use is at its highest (especially in America) Since 9/11 we have seen a major increase in East / West tensions, and it seems to be getting worse. Not a recipe for a falling oil price.

I still feel that momentum trading is a very interesting, and potentially very lucrative strategy - and it is not dead. If you can spot a change in trend early, you can make a lot of money by riding the momentum. The trick to being a good trader is to buy at the bottom (or as near as possible) and sell before the top. As Lord Rothschild once said "The reason I am so rich, is because I always sold too soon".