T2W Trading Community

Is trend trading essentially restricted to longer-term position trading, or can day and/or swing traders trade in this manner as well?

I'm not sure exactly what people mean when they say day trading or swing trading. I assume that means shorter term trading. Trend following techniques are not short-term in nature.

For a good short term trading story, consider the question trend follower Ed Seykota was recently asked in his chat forum:

"I am new to trend following and wish to ask you what your favorite chart is for determining a given market's trend? Daily, Weekly, Yearly, Hourly?"

Seykota responded:

"Hmmm...your list seems to lack scaling options for minute, second, and millisecond. If you want to go for the really high frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light "by eye." I don't know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher frequency trading succumbs to declining profit potential against non-declining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor - something like a daily price chart, going back a year or two."

I agree with Ed's pithy wisdom, but he is not saying short term is impossible.

There do exist shorter term systematic traders who have done quite well (Toby Crabel, Jim Simons). They would agree with Ed that their style is hard. The shorter you go the more you need great execution, fantastic data and multiple systems. To be a great shorter term mechanical trader is a different animal than trend following, but it is a style that a select few have mastered.

So how does one go about identifying a tradable trend?

Trend following involves far more than simply attempting to "ID a trend".

In my book I outlined the proper way to think about trend trading including how to find a trend. First and foremost you must answer these 5 questions before you ever start trading:

• How do you determine what market to buy or sell at any time?
• How much of a market do you buy or sell at any time?
• How do you determine when you buy or sell a market?
• How do you determine when you get out of a losing position?
• How do you determine when you get out of a winning position?

Yes, IDing a trend is important, but it is a piece of the puzzle. For those familiar with technical analysis, you are most likely familiar with price breakouts. Those are typical means used to enter the market when trading as a trend follower. But now that you see the 5 questions you need to answer, doesn't the question of "how do identify a trend" seem like the wrong question to be overly fixated on? And for whatever reason, people are overly fixated on this.

Think about this way. Locating targets of opportunity in their crosshairs is the goal of all Trend Followers. Bill Dunn, a great Trend Follower for over 25+ years, nicknamed one of his funds T.O.P.S. to reference targets of opportunity systems. Trend Following is a classic targeting of an opportunity. Take what is given and ride the crest of a trend up or down. No prediction. Here is a great chat post:

"Trend Followers accept the limitations in one's ability to understand all of the structural linkages between supply and demand. The world is complex and hard to understand, and there are different levels and types of uncertainty. There is certainty that markets will move but the direction may not be predictable nor is the level of change discernable. Trend Followers use directional signals because price adjustments may indicate movement to a new equilibrium. In an uncertain world, a market trend may be a rational strategy."

Unlike many traders, who typically employ a passive buy and hold strategy, and only depend on rising markets for profit, Trend Followers use dynamic strategies designed to take long positions (in a rising market) or short positions (in a declining market), to profit from both.

Trend Follower View of World:

• Unstable world.
• World is uncertain and dynamic.
• Market players form rational beliefs but make mistakes.
• Learning takes time; slower adjustment to information happens.
• Fundamental changes are often unanticipated.

Non-Trend Follower View of World

• Stable world.
• World is knowable and static.
• Market players generally form rational expectations.
• Markets adjust quickly to new information.
• Fundamentals do not change dramatically in the short run.