Tuesday, January 1, 2013

Going with the Flow

Trading with the trend - which is to go with the flow, is not an original idea. The concept has been around as long as markets have been trading - probably thousands of years. This is the only proven way of making money in markets.

Yet, most traders will have the strong desire to go against the prevailing trend - by calling tops and bottoms, or reversals.

Why?

I assume that a strong desire to be be the first person to buy at the lows and sell at the highs,  controls most of our trading actions. While our desire should be to be profitable, what actually emerges from our actions is our ego - we went long when no one else was willing.....

But simple probability favors going with the trend.

Traders have three possible actions at any given time: Buy, Sell or Stay Away. This means they have a 1 in three chance of getting the correct decision. If the trend is up, the trader will not keep the option of selling. Then he has two options: Buy or Stay Away. Now the probability has increased to one in two.

At some point the trend reverses, but wise traders will not be taking that reversal. They ill exit from existing positions, and, probably wait for confirmation of trend change.

Remember, trading is about building a house, brick by brick, one trade at a time.

Happy New Year. 

3 comments:

Dinesh Rishi said...

Happy new year and thanks for the beautiful post.

sometimesbullsometimesbear said...

Simple and logical. The only thing that remains is for the trader to identify the trend accurately, which should not be difficult if one has been around for some time in the market.

Wishing both you and CNBCTV18 a happy new year.

sometimesbullsometimesbear said...

Simple and logical. The only thing that remains is for the trader to identify the trend accurately, which should not be difficult if one has been around for some time in the market.

Wishing both you and CNBCTV18 a happy new year.