Trend Followers make money in the market not becasue they predict anything but becasue they buy what is going up and they sell what is going down. They discover ways to measure and react to trends based on history. Trend traders identify a trend and enter a trade with predefined risk for the trade and make a plan on how to exit based on the capital at risk per trade and a price level that will tell them that they were wrong.
“The whole world is simply nothing more than a flow chart for capital.” – Paul Tudor Jones
But… What causes a “trend”.
- Investors and traders have capital that they want to put to work, they choose to buy what they think will appreciate in value. As more and more capital flows into an asset it goes up in value as more outside money wants in to a limited supply of a stock. Example> AAPL
- Key moving averages provide lines that traders watch and decide are good entry points for great risk adjusted returns. The 50 day and 200 day are great examples of support areas where downtrends in the best stocks reverse and up trends begin. Recent examples are AAPL at the 50 day and GOOG at the 200 day this year.
- Many times a stock will trend straight up and a short term moving average will act as support for the entire up trend with very few if any breaks. > For example the 5 day simple moving average for CMG.
- Stocks go up for only one reason: that the current seller is not willing to sell for the current market price and the buyer is willing to pay more. Stocks move up because sellers will not sell for the current price and buyers are willing to pay more to get in. The stock market is an auction not a retail store, supply and demand make prices.
- Capital flows where earnings expectations grow. Traders and investors buy stock in companies they believe will increase in value based on the underlying companies projected increased earnings.
- The only reason buyers buy a stock is that they believe they will be able to sell it for a higher price later. Stocks go up on the belief of higher prices in the future.
- Short sellers can drive trends by selling heavily on the belief that a stock will go down and drive the price down, and then cause a rally when all the holders will no longer sell and the price rises and cause the short sellers to panic and buy back the shares they shorted.