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Michael Gibbons on “Trend”

Michael Gibbons of Gibbons’ Trading LLC provides good insight on “trend”:

“The reality is, most hedge funds make money on the long side of the market. That is, to get and maintain their clientele, they must focus on long only trades. To attract clients, they generally must claim they are fundamentalists, as technical analysis (specifically market timing) is out of favor at the moment. Now trading the long side of the market based on fundamentals (whatever they are), is still premised on the existence of a trend. That is, since the trend is the basis of all profit, the market has to be moving in your direction to make a profit. If you buy at A and sell at B, and the trade was profitable, the market went up-or trended (at least for as long as you were in the trade). Very few people can correctly define trend; I will do that here: it is something that repeats. So funds that trade the long side of the market, still require the existence of a trend to make a profit. Therefore, all those that would deny that they are trend followers are in fact, trend followers. They may not be consciously aware of it, but metaphysically, they are relying on the presence of trends to make money. Their methodologies may not be trend following algorithms, but nonetheless, they are in bed with true trend followers-even if they are not aware of it. The directional movement of a market determines dollar profit. If the S&P 500 goes from 1000 to 1500 and we are long, we make 500 points of profit less fees. The move from 1000 to 1500 was something that repeated-the S&P kept going up. The directional movement was up caused by the presence of a trend. Therefore, any attempt to deny that the trend is the basis of all profit, is a logical contradiction. True trend followers eliminate the rationalizations-they just admit they need trending markets to make money, and act accordingly.”

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