The trend is your friend. While not the most exciting way to play the markets, using a trend-following strategy can help investors build wealth consistently and avoid big losses.
For example, some of the most successful long-term investors have ridden market trends.
It’s all about knowing which way the wind is blowing in markets, and ETFs are attractive tools to implement trend-following strategies.
Critics of trend following have downplayed the strategy, suggesting that the winners are “lucky monkeys,” writes Michael Covel for Trader Planet.
However, trend followers have been able to outpace market average through tedious and persistent monitoring over long periods – “there’s no romance in trend following,” some have said.
“You don’t spot trends. You don’t find trends,” Covel wrote. “You react to market movements, and hopefully at the end of a big move, a big trend, you will have made great money from that big trend. ”
For instance, here we look at the 200-day exponential moving averages. If an ETF crosses over, it is a buy signal, and if it dips below, it is time to sell. [An ETF Trend-Following Plan for All Seasons]
Over the past decade or so, a simple trend following strategy would have steered investors to exits after the tech bubble and again after the 2008 financial depression while signaling investors to re-enter once the trends returned.
On the other hand, investors who bought and held the S&P 500 over our lost decade would have noticed that their investments are only now inching back to the highs at the turn of the millennium.
Moreover, if you implement a trend following strategy, investors should tenaciously stick to it. An investment strategy will help investors trade on logic instead of relying on fight-or-flight instincts.
“Trend followers don’t get entry or exit signals and apply some extra layer of ‘human judgment,'” Coval added. “They don’t try to be smarter than the system. ”
For more information on trend following, visit our trend following category.
Max Chen contributed to this article.