Befriending a trend

July 20, 2009

Trend is your friend.

This is an old cliche every market player knows, but Jack Ablin, chief investment officer of U.S.-based Harris Private Bank, argues against befriending all trends blindly.

In his new book, he says: “One must recognise the point at which that trend is old and about to shift gears, alter direction, or simply vanish altogether… It’s the new, new thing that grabs their attention.”

Harris Private Bank’s analysis shows that relying on the signals sent by the 200-day moving average — a technical strategists’ favourite arsenal in gauging momentum — would have fared better than just following the advice to “buy and hold”.

The $100 invested the Dow Jones Industrial Average in December 1980 would have increase to $1,681 if you followed the momentum trading strategy of buying when the Dow moved one percentage point above its 200-day average and sold when it dropped one percentage point below its 200-day average. The buy and hold investor would have ended with $890.

“Momentum metrics, used correctly, can help you pull your chips off the table at the right time more reliably than any other signals,” he writes.

2 comments

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Everything looks better looking back and trading past data. The real problem with momentum trading and using technical indicators is who are you talking to? Large institutions or individual investors? Given the $100 example, I assume it’s meant for small investors.

The problem is small investors get involved emotionally with every tick. And very few will blindly execute trades based on software. The only way you can execute trade after trade with extreme discipline, win or lose, is automatically. And most small investors won’t do that.

Buy and hold is suggested, not because it’s better. But because most investors don’t have the discipline or stomach to trade in and out of positions.

I agree with you a 100%. Sticking to a simple discipline such as this protects investors. This last week shows how nimble an investor needs to be.