Just musing about "trend following";
It's fundamental to ask, "Do stocks really trend, or are apparent trends just the result of random chance ?" There are people who think the latter, but I think our game might hinge on the belief in trends, and the rejection of the suggestion that price changes are just random.
Sure it's a game of probabilities, but don't we believe that the probability of a stock rising in price is greater if it has been going up than it would be if it has been going down? If so, why not put probabilities in our corner ?
Is there really "more to it than that" ? Isn't the direction of stock prices all that matters ? Sure we can like a stock's fundamental story, but do we really want to own it if it is not going up ? And if we do own it, shouldn't we want to buy more if it starts going up, and reduce our ownership if it starts going down?
Swampdog says it much better than I can. "If the train is going west and you want to go east, do you climb aboard, or do you hop off ?" Right now there are stocks going WEST an others going EAST.
As a strategy, trend following leads to many false starts, for noone knows whether the trend will endure. Even the best trend followers suffer from very significant draw-downs, as losses are taken. Draw downs are inevitable. |
