Why Trend Following Is Not Main Stream

Feedback from a reader:

Hi Michael,

I bought your excellent book and it is really changing the way I think about speculating in stocks. I wrote a newsletter today which includes some reasons why I think trend following can’t go mainstream or why it isn’t right now…ssome theories and reasons why trend following is not a main stream trading system:

1. Totally ignores fundamentals. So a trend follower could be shorting a stock that just experienced record earnings or he could be going long a company with no profits and tons of debt. This goes against what you have been brainwashed by the media.

2. Radically simple. Just tracking price movements seems way too simple to make money in the markets. We are brainwashed that you must do hours upon hours of “due diligence” before you buy a stock. But the problem is that in reality, companies with terrible fundamentals go up and many companies with great ones go down.

3. It’s a trading system that requires strict discipline. Again, media recommends “buy and hold” with no exit strategy whatsoever. And if you’re wrong, you should buy more because the stock with those great fundamentals you bought has just gotten cheaper. Trend Following is a numbers game too where only 40% of your trades will be profitable. So yes, 60% of your trades will lose money but as long as you are disciplined and cut your loses short you can still do very well in the markets.

4. It recommends going short as often as you go long. People who short stocks are portrayed as demons in the media. Shorting is seen as evil because shorting bets on stock prices going down and nobody wants that right?

5. Doesn’t require the whole analyst/glamour of the financial industry. If people learn that they can trade successfully by following queues from simple stock charts and moving averages, then they don’t have to read CFA’s research reports. They don’t have to watch ROBTV or CNBC to hear some fund manager discuss why he thinks stock X will go up and why you should buy it. Think about all the very high paying jobs that could be potentially eliminated if every investor just followed the trends…

That’s just the way I see it anyway.

Keep it up,