Leaving Money on the Table

Trend Following, by design, leaves money on the table. It does not try to milk every trade for every penny. It aims for profit, but not greed. It accepts missing tops and bottoms in order to capture the middle of trends.

We humans love predicting, buying bottoms and selling tops. The cost of these behaviors outweigh the profits, though. Many people choose not to buy stocks during this 7–8 year bull market because the perfect buying opportunity never occurs. The market never pulls back enough to justify getting in; no one wants to be the sucker who buys the top. Being a human, myself, I understand this pain. However, waiting for a pullback to get in at “better prices” often times keeps you out of the market altogether and, as a result, you miss the trend. The pain of missing the long-term trend outweighs the pain of overpaying in the short-term.

In the chart above, I overlay simple long-term Trend Following indicators — the 5-month and 15-month exponential moving averages. On a daily basis, they equate to 100 and 300 days. When the 5-month (red line) crosses above the 15-month (green line), you buy. When it crosses below, you sell.

In occurrences #2, 4, 5 and 6 you may notice the buy signal occurs after prices rally well off the bottom. In September 2009, for example, you’d buy in after prices rally ~35% off the March lows. In #1 and #3, you’d sell out well after the market tops. In long-term Trend Following, you purposely miss bottoms and tops in order to capture the bulk of the trend.

You only see a market top after it occurs — when you can do nothing about it. You cannot go back in time and sell. The Monday Morning Quarterbacking won’t change anything either.

In the heat of the moment, when markets are moving up and down, unless you have clear rules on when to buy in and sell out, you’re likely to cut winners short and let losers run against you for too long. With simple indicators like the ones used below, you give up the desire to predict tops and bottoms, but instead just follow the signals.

Accepting the fact that we cannot predict tops and bottoms improves our ability to make money. Taking a reactive and adaptive approach to investing, like long-term Trend Following, allows us to make money from sustained trends. All you have to do is accept the fact you won’t buy the bottom or sell out at the top.

Long-Term Trend Following in Some Other Markets

Gold

Crude Oil

Amazon

Euro Currency

Delta Airlines

Costco

Macy’s

Disclosure

Past Performance is Not Necessarily Indicative of Future Results.
There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice.

These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.

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