ETF/No Load Fund Archives: Revisiting The Basics Of Trend Tracking

Some people are using the basic ideas of trend tracking in their investment approaches without even being aware of it.

I was reminded of that yesterday as I was reading Random Roger’s blog. Here are a few points he addressed, which are the essence of our trend tracking methodology. His points are excellent and he says, among other things, that:

1. Perma-bulls are not planning for a cold winter

True. Most people remain bullish no matter what and have no exit strategy to protect themselves from severe market reversals. While we will never sell at the top of the markets, we try to be within 10% of it.

2. Perma-bears are missing too much normal upside movement

True. While we can determine a potential top in the market only after it has happened, the same holds true at the bottom. However, with a clearly defined entry strategy, we attempt to be back in the market within 10% of the bottom.

3. Personally I don’t see the benefit in trading ahead of an Armageddon (intentional hyperbole) that has shown no signs of starting.

True. Guessing is what gets most investors into trouble. Usign trailing sell stops allows you to see whether the market is actually rolling over and correcting. Let that fact tell you when it’s time to get out.

4. I also think it is irresponsible for the perma bulls on the various TV shows to never talk about exit strategies, what signs to watch out for or even acknowledge the bear case.

Couldn’t have said it better myself. Most media articles and financial TV shows never make a case for the bear, as I have posted about before. Not only that, but performance figures conveniently only cover bull markets.

5. I also think it helps clients to acknowledge that down turns come, they should not be feared and that we have a simple exit plan to take defensive action when the next bear market starts.

Amen. These are 5 points that trend tracking accomplishes without becoming emotionally upset or suffering from sleepless nights.

Discomfort when investing almost always stems from the fact that you are uncertain and have no definite plan to deal with unforseen events. Once you resolve this issue, by being methodical in your approach, you will be less inclined to suffer emotionally (and financially) when markets go against you.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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