Trend is a direction that something is moving, developing, evolving, or changing. A trend is a directional drift, one way or another.
When we speak of price trends, the directional drift of a price trend can be up, down, or sideways.
Traders can be either directional traders or non-directional. For example, all investors are directional: they invest in a thing and want its price to go up. A trader can be directional: buying a stock, bond, commodity, or currency, hoping it will go up with them or they can sell it short hoping it will trend directionally down. They are directional traders, so they necessarily need to define the direction of the trend. Which way is it drifting? However, not all traders are directional. Volatility traders who trade volatility through listed options or futures are trading movement itself, so they aren’t concerned at all with the direction of the trend – they just want movement. Volatility traders may have no bias at all in regard to the direction, they focus on movement or lack of.
Trend Following is a directional strategy that requires the portfolio manager to determine the direction of the trend and enters that trend expecting inertia and momentum to continue in that direction. There are more than 300 published academic studies alone that prove that the most recent 3 to 12 month price momentum tends to continue rather than reverse. That doesn’t include the vast research and testing conducted by actual trading firms and hedge fund managers (like mine) that are not published to the public. These methods rely on directional trends to exploit for profit.
Counter-Trend is another directional strategy that requires the portfolio manager to determine the directional trend. However, a counter-trend system is designed to identify trends that are more likely to reverse and change direction than to continue. It may seem this strategy is the opposite of trend following, and in some ways it is, but countertrend systems are based on different time frames when executed correctly. For example, a trend following strategy that has been profitable has necessarily identified trends that tend to continue and profits from the magnitude of those gains. A counter trend can also be profitable and even combined with a trend following system. A counter trend system identifies reversals when the trend has changed or likely to change. The time frame, then, is different. For example, while academic research shows that directional momentum over the recent 3 – 12 months tends to continue for another 12 months or longer, they also find that trends have lasted 4-5 years tend to reverse and change trend. You may notice that stock market upward trends (bull markets) last about 4-5 years before the reverse into a downward trend (bear market). You may also notice investors and their advisers have a tendency to buy funds with the highest 5-year returns, only to catch the end of the good performance. You can probably see how they are “trend following” but using the wrong time frame. We find that trends actually reverse around the time those performance tables look appealing to investors. Counter trend systems aim to get positioned for big reversals in trend to profit from their directional change. Skilled counter trend portfolio managers develop and operate countertrend systems that are proven and quantified to identify and profit from such changes in trend.
For more information or questions about trends, trend following, and counter-trend, or my systems feel free to contact me. For information about my ASYMMETRY® Investment Program that applies trend systems to capture potentially profitable trends across global markets like currency, bonds, stocks, commodities, and alternatives like inverse and volatility, visit Shell Capital Management, LLC.
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