Philosophy of Trend Trading

The concept of trend trading stems from the idea that the best way to trade the markets is through the understanding of the constant that is the markets participants.

It is vital that you understand the logical basis for this approach, so you can firmly appreciate how hard it is to do and so you can summon the inner strength to follow these techniques during difficult times. Without this understanding there is no way anyone could consistently apply these techniques.

Hence trend trading attempts to understand and benefit from human nature and feelings in specific instances.

It is this act of people voting with their opinions that moves markets.

This type of human behaviour is somewhat easier to interpret than others as we notice a collective commonality of the madness of the crowd or ‘herd mentality’.

How Does a Trend Happen?

A trend simply reflects some alteration [perceived or genuine] to the supply and demand dynamic from that which was previously factored into the price as it was previously thought it would exist and the market must adjust to reflect this new outlook. [Simply put — the underlying factors affecting price considerations have changed hence the market price must adjust accordingly]

When all is normal in the world prices tend to stay in a sideways band. Every now and then supply or demand changes and that is what a trend is, it is the market adjusting to its new fair price and equilibrium. This of course is a meeting of the minds of buyers and sellers, so price must travel to this new equilibrium, by consensus i.e. there is akin to negotiation in price as participants trade with one another at satisfactory rates.

The result is that in upward trending market buyers offer higher prices and sellers may delay somewhat in accepting those prices hence the prices rise. Also with an overabundance of buyers they will place sequentially higher orders to buy to ‘lure’ sellers to part. The seller will then choose to accept the highest prices and at that point the market price has moved up to that new level.

When the price reaches its new supply and demand equilibrium the price stops trending and begins to go sideways [i.e. remains relatively flat] and typically will remain that way until the relationship of supply and demand changes again, which it inevitably will at some stage.

As a result of the very fact that circumstances change trends are bound to occur so the choice is whether to try to ‘beat’ scores of fundamentalists in large institutions studying those changing factors or to simply accept their decisions with regard to price and trade in favour of capital flow. It is this latter approach that we endorse. Education in the former is too laborious, subjective and specialist for most new traders.

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