How To Get In With The Trend And Out At The Endby Bryan Strain
Need a simple trend-following system to get you right with the market? Take a look at this.
Good indicators must have an easily explainable, fundamental reason for working, trader and technician Don Fishback remarked once. "If not, then the indicator is only a curve-fit whose performance just happens to be coincidental looking backward." Generally, I have found that the most successful traders are those who don't pretend to be smarter than the market. They let the market tell them what and when to trade. The trend is your friend, after all.
FIGURE 1: TETHER LINE. When prices cross above the tether line, a buy signal is generated. When they cross below the line, a sell signal is generated.
The trading system I will discuss is an accumulation of some of the most effective methods and ideas I have come across. As a result, the system is not original, nor are the ideas behind it; but this is the first time that I have been able to determine that they have been brought together.
There is one more point I must clarify. Many technicians believe that technical analysis is the only necessary factor in making trading decisions. I beg to differ. Technical analysis is a way of analyzing public opinion and market psychology by measuring price, volume, volatility, and so forth. Knowledge is power, and those who have the most of it always win at the end, no matter how strong the opponent. To acquire knowledge about the markets, you need to know everything you can about a specific company before you enter a trade; therefore, you cannot ignore fundamental information. Before you enter a trade, make sure the company has fundamentals that favor it.
The system I have designed, the trend-following system (TFS), was created to specifically keep you in a winning trade as long as possible and out of a losing trade as early as possible. TFS does not identify tops or bottoms, but it keeps you in the black on major moves and gives you a large percentage of profit. It is a system that lets the market tell you when to enter a trade and when to exit.
TFS is designed for end-of-day trading specifically for equities. It is not meant for trading futures, fixed income, or short selling. Its principles may work on periodicities other than dailies, but I have not tested the system to determine where. The fundamental reasons that explain why the system works pertain only to long positions in the stock market.
Bryan Strain, an analyst for Fishback Management and Research, has been investing successfully for years. He currently teaches investing techniques at seminars across the country. He may be reached via E-mail at firstname.lastname@example.org.
Excerpted from an article originally published in the June 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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