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Newbie Do's and Dont's has big trend-following bias

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FL   Monday, 02/13/06 10:22:42 PM
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Newbie Do's and Dont's has big trend-following bias

Two main trading approaches are opposed to each other: 1. trend-following. 2 reversalism (which could be called "trend fighting" if in fact there are price trends at all).

When something goes up, the trend-follower buys. If it goes up more, he or she may buy more. The reversalist, on the other hand, is looking for a reversal, or a "reversion to the mean." If something goes up (to the top of its "channel") it's time to sell.

These views are basically opposed, although a trend-follower is really a LONG-TERM reversalist, simply believing in big reversals that are far apart in time. Neither one is mainly an "investor," for income, since both are speculating on price.

It seems that 70 to 90 percent of the postings on this "Newbie Do's and Dont's" board are restatements of the main rule of the trend-followers: Cut your losses soon, let your gains run. How many ways can the same point be made? (There are also some "money-management" messages.)

Is this because the trend-followers are simply right? Or is it just the bias of the board leader, and posters, towards trend-following?

Victor Niederhoffer is a reversalist author of investment books and articles. He says "The trend is not your friend." Others, like the "Turtles," were famous trend-following traders. They said "Losers average losers." Jesse Livermore (the Great) started as a reversalist in his youth, but converted to trend-following as an adult. The Dow Theory (of Dow, Hamilton, Rhea and Russell) is basically trend-following. In the "Market Wizards" books by Jack Schwager, the consensus advice is: follow trends, cut losses soon.

I'm too lazy to trade wiggles in price, as the short-term reversalist must do. To me, investment wisdom is "juncture recognition" -- recognizing the rare times, like 1929, 1974 or 2000, when there is "a turn in the tide" and bull market becomes bear market or vice-versa. (That, plus stock-picking, a different skill.) I like it when laziness is a virtue.

Both approaches might work -- but not for many people. The vast majority of traders LOSE MONEY. I wonder why the people on these boards think that they will not be in that majority. On the other hand, Goldman Sachs and Lehman Brothers have trading departments that seem to make money every year.

Anyway, the extreme bias of "Newbie Do's & Dont's" towards trend-following should be noted.








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