Understanding some of the basic fundamentals to Trend Following – BAMBOO!
…. Sorry guys, another longish one… You have been warned!
Looking at the stock in the picture, we can see that some evil, unscrupulous person, (ok, it was me) has removed the company name and any information about it. All they have left is a yearly candlestick chart with a few notes on it…..
Sooo, with just looking at the chart, would it be a good idea to invest in this stock?
There are a few schools of thought on this…
1. Looking at the current price, it would seem like, YES, it would as it is almost trading at its 1999 price.
2. It looks like that company is having a hard time and maybe close to folding?
3. If I bought in now, I am bound to make some profit as a drop that big over time, even a slight climb would make me some money.
4. Not a chance would I touch this as this stock has terrible momentum and either spends time in consolidation or dropping in value.
At this point, chances are that most of us would choose option 4 as let’s face it, though it has had a few climbs and tried to get back to a decent point, it seems to keep failing and being pulled down again.
The other obvious reason for choosing this option is because we have no idea (well, some probably do, just by looking at the candlestick patterns) which stock this is so our decisions are being made solely by chart trending data, not by market news, not by our bias towards it being a company we like and know is bound to do well and bounce back….
YES, WE HAVE JUST SUCCESSFULLY DETACHED ALL EMOTIONAL BIAS FROM THIS COMPANY AND ARE NOW MAKING A DECISION SOLELY ON DATA…. We have basically become the Mr Spock of Stocks and Shares World
THE SWITCH – (I’ll explain what this means in a moment!)
Ok, now let’s mix things up a little and add some possible bias!
1. The stock we have been looking at is actually British Petroleum (ticker: BP.)
2. We are aware that BP have very deep pockets.
3. Chances of BP folding are pretty darn slim (to almost non-existent)
4. We know that BP is making headway into greener cleaner energy.
5. We know that there are very few companies actually capable of pushing BP to the side.
6. Their investment budget is more than what most companies are valued at.
All of a sudden, there will be a few people thinking, “Hell, it’s BP and they are totally worth putting money on as in the end, of course they will come good. They’re not going anywhere”
We know the above thought process goes on as we just have to look around on different forums (this one included) to see this.
Ok, I know that not everyone will think about investing in them just because they now know that they are BP, but some will.
Back to THE SWITCH – Let’s say that we knew from the start that this was BP, this would mean that there would be quite a few more people that would consider investing in this stock as there is some sort of EMOTIONAL BIAS in play.
“But Gio, you’re wrong. There IS NO Emotional Bias in play. I have no intentions of letting my emotions get in the way of my trading!”
For a few people, this could be true and that is fine. But there will be many others that the moment they see it is BP, straight away (literally within milliseconds) their brain will pull in one or more of the 6 points listed above, and chances are that now, some sort of emotional bias is coming into play.
One may think that there is nothing wrong with a little emotion coming into it if it means that “I get to run an analysis on the company and see what is happening in their future“.
Fair enough, though if I thought like this, I would need to ask myself one simple question…
“Am I here to make money and not get attached to any stock, no matter who they are, or to select a portfolio of good strong stocks that I know aren’t really going to go under?”
In the question above, the answer is in the charts… (no, I don’t mean as in trying to read your future or star sign)
If I went for strong company stocks, then my portfolio may contain stocks like..
HSBC
Shell
British Airways
BP
**They are all good companies**
Now, if I were to choose stocks BASED ON TREND ANALYSIS and chart data, my portfolio may look like..
NVIDIA
Ocado
PayPal
Amazon
….. (actually, I did choose stocks based on Trend Analysis and Ocado, PayPal and Amazon are already in my portfolio anyway)
**These are also good companies**
Granted, both are strong bags to hold, BUT there is a big difference in the returns on those two portfolios. Let’s just say that if you held the second one over the past year, you would be seeing some amazing gains on your investments… (some of those are actually well over 100%)
Yes, but it is EASY to look back at stocks and say “Let’s see what I could have made if I was in it from the beginning”.
This is where Trend Trading comes into play… You see, one of the secretes to Trend Trading is that I do not have to be worried about catching a trend at the very beginning and squeezing every last penny out of it until the very end… Yes, this sounds great, but this is where quite a few get burnt as they want EVERY LAST DROP OF THAT STOCK…. Not good as you’re basically trying to “Time The Market”, and good luck with that!
To properly Trend Trade a stock, what you do is try to understand certain Indices trend, the stock trend, and there are few basics you need to understand also before you can do this, one is “Trading Volume“. There are quite a few other points to look out for also but once learnt, one can actually run this process against any stock/commodity etc within moments… (yes, that’s right, RUN AN ANALYSIS WITHIN MOMENTS)
If one trades by catching trends on a number of stocks, not being too greedy by trying to catch the very beginning and the very end, but just catching decent profits whilst a number of their stocks are trending, then it all adds up to a nice healthy portfolio, and surely, at the end of the day, that is what trading should be all about, a healthy portfolio.
Ok Gio, almost fell asleep a few times reading that, but something is bugging me… At the very beginning, within your title, you put the word “BAMBOO” all in caps. What the heck was that about?
It is to remind me of a quote by Ping Fu and something I relate to Trend Trading… Part of that quote, reads…
“Bamboo is flexible, bending with the wind but never breaking, capable of adapting to any circumstance. It suggests resilience, meaning that we have the ability to bounce back even from the most difficult times… Your ability to thrive depends, in the end, on your attitude to your life circumstances. Take everything in stride with grace, putting forth energy when it is needed, yet always staying calm inwardly.”
This is how a Trend Trader must be. We can’t fight the stock market and try to make a stand, no matter what, as the markets hold too much momentum and if we tried to do this, it may and often does eventually break us.
Instead, we need to be flexible, allowing the stock markets/charts etc to dictate the path it chooses to take and we are there to understand that path and armed with our chart’s knowledge, allow it to gently steer us as we take profits. We go with the flow within the stock markets, all the while we keep growing.
If one learns how to properly read and understand the charts, and also how to patiently do this (with the correct stop losses, of course), then we can’t really go far wrong
**Note** – Anyone that has spent time in the trading industry knows that it is impossible to have a 100% success rate on every stock they choose. This is why properly calculated stop losses are also a part of Trend Trading, so that one can MAXIMISE SUCCESS and MINIMISE LOSSES… Oh, not just maximise success, but learn how to compound on this so that we add to our winning trades and end up making even more….
*edit* – If anybody would like to gain a better understanding into Momentum, or Trend Trading, more than happy to point you to some free videos that explain what this is about…