Secrets of Trend Following

I disagree. Computers don't erase "edge." For every trader with a computer program saying "buy," there are nine other traders with computer programs saying "sell." No matter what you do, markets go through different stages: accumulation, runup, distribution and decline.

You need a plan to handle those stages with a positive expected value, just like the edge maintained by the Vegas casinos.

Look at it this way. You are just starting out. You are new to the game. Perhaps you have had some career success and saved a little money. Perhaps not. Maybe you are in college, maybe you are retired, or maybe you're just ready to trade. Whatever the reason, once you start the process of entering the markets, you will need money to play the game.

There is no stated minimum capital to trading as a trend follower. There is no magic number. There are many factors relating to your starting capital, not the least of which is your own personal discipline and ability to stick with a trading system or stick with a trading advisor. Anyone who gives you an exact figure for starting capital is either conning you, or more probably, dismissing your query with a mindless answer. A top trader was asked this same question. He responded, "I ask the trader who thinks he needs a certain amount before he can trade exactly what amount he would need to stop trading."

No one can guarantee you profits, whether you start trading with $5,000, $500,000 or $5 million. There is no dollar amount too little or too big that allows you to sit back and assume that your starting capital alone is some pivotal key to success. Rather than focusing on starting capital, decide how you are going to trade. What is your trading strategy going to be? Have you answered these five questions?

1. How do you determine what market to buy or sell at any time?
2. How much of a market do you buy or sell at any time?
3. How do you determine when you buy or sell a market?
4. How do you determine when you get out of a losing position?
5. How do you determine when you get out of a winning position?

A complete trend-trading system uses these five questions to establish rules for entry and exit, along with rules about how much to buy or sell at any given time. Trend followers have rules ready to answer those five questions regardless of the particular day, week, month, year or current market condition.

Still, people ask, "How do you determine a trending market?" Wrong question! The question is, "How do you make money?" The answer involves taking small bets early on in a market (that is, starting to move or trend) to see whether the move matures and ends as a big trend. Trend followers enter markets long before the nightly news is reporting new 13-year highs in whatever market.

When the financial news starts talking about high oil prices or a stock at record lows or highs, trend followers have long since established their positions (and profits) and may be exiting when the late-to-the-party amateurs start taking their positions.

At the end of the day, good trading is a game. It's all about odds. It's all about probabilities and payouts. Trend followers focus their energy there, not where 99% of the crowd fixates. It's their edge.