Almost all market participants acknowledge the importance of implementing trend-following trading strategies in investment trading. However, in actual practice, there are not many investors who can follow the trend. The main reasons are a lack of understanding of trend trading, insufficient practical experience, and the influence of negative psychology. The author believes that to follow the trend, one must have a high level of practice in theory, practice, and psychology.
1. Understand and comprehend trend analysis theory.
At first glance, the phrase 'follow the trend' is easy to understand, but it is not that simple. This is because 'trend' has different forms, such as rising, falling, or sideways trends, as well as strong, medium, or weak trends. Correspondingly, investors' responses to different 'trends' will inevitably vary. Thus, understanding the trend and clearly seeing it is a prerequisite for trend-following trading.
First, one must deeply study and master the classic theory of trend analysis—Dow Theory—and grasp its essence and connotation. For example, remember and understand the objective discussion of trends: once a market trend is formed, it will inevitably develop to where it is supposed to go, and any influencing factors can only delay the trend but cannot reverse it. Mastering this discussion will strengthen investors' resolve to grasp trends without being swayed by other factors. For example, remember Glenville's several rules regarding the application of trend theory: when a price is confirmed to be in an upward trend, every price pullback day is a buying opportunity; when a price is confirmed to be in a downward trend, every price rise day is a selling opportunity; when an unconfirmed upward trend is reversed, every price pullback day is a buying opportunity; when an unconfirmed downward trend is reversed, every price rise day is a selling opportunity.
Secondly, learn to analyze trends using a dialectical approach. Different periods, different markets, and different varieties exhibit price trends that, while sharing the same basic nature, have their own characteristics. For example, the strength of trends varies at different stages, the duration of movements differs, and the timing and expectations of grasping trends also vary.
2. Accumulate experience through practice.
Experience is wealth; it is the further sublimation of knowledge through practice. Any knowledge learned solely from books will not be truly learned; only by going from books to practice and then back to books through repeated cycles can one learn effectively. This is especially true for knowledge in the investment market.
The true meaning of following the trend is to grasp the best trading opportunities along the direction of the trend. Clearly, when prices are rising, one should buy when prices pull back to support levels, and when prices are falling, one should sell when prices rebound to resistance levels. This operation is what it means to follow the trend.
An important premise for applying the trend-following strategy is that the market trend must first be confirmed. Failed investors often misuse the concept of following the trend. For example, they may not establish a concept of market trends and fail to distinguish between trending and non-trending markets. When the market is non-trending, they still buy on rises and sell on falls, which is why investors often find themselves caught off guard. Therefore, it is crucial to distinguish between trends and the stages of those trends. However, turning a strategy into conscious action requires a process and the accumulation of practical experience. A good strategy is like a good car; to use it well, one must not only be familiar with its performance and characteristics but also frequently drive it to accumulate experience and become skilled.
3. Forge a strong psychological quality.
The success of an investment depends on three elements: psychology, methods and techniques, and luck. The quantitative combination of these three elements in successful investing is six parts psychology, three parts technique, and one part luck. In practice, we also have direct experience that psychological factors are the most crucial link in implementing trend-following strategies.
Knowledge and experience can be enhanced through diligent study and practice, but psychological issues involve factors such as personality, strength, knowledge accumulation, and environment, making adjustments more difficult. The psychological factors affecting successful trading primarily stem from human weaknesses, including hesitation, procrastination, fear, greed, and luck.
Market opportunities are often fleeting; hesitation and procrastination are major taboos in trading. For example, when the market breaks out, one should respond immediately, but most investors tend to hesitate and procrastinate, accustomed to 'wait and see,' causing them to enter the market only when it starts to adjust, leading to losses.
Fear is the enemy of investment, and procrastination and hesitation are actually also caused by psychological fear. Not earning when one should, not stopping losses when one should, fearing that a cooked duck will fly away… all these are manifestations of fear. For instance, when prices rise, investors often experience a fear of heights, making it difficult to execute trend-following strategies; when prices fall, they fear missing out on low prices, prioritizing price over trend, leading to failure in counter-trend operations.
Message: 'Before trading, have your own plan, whether for profit or loss. Trade your own plan and plan your trades; secondly, need to strictly control risk, do not trade with emotions, and if wrong, admit the mistake. In trading, you need to believe in yourself, but more importantly, believe in objective facts; the most important point is to ensure the safety of your principal!'
