Trading with a Trend Following System
A visitor to is learning about stock market trading and using a virtual stock exchange program called Stock Trak. She is excited about having the opportunity to take a $1300 profit on THI (Tim Hortons, Inc. listed on the TSX and NYSE). She asks me if she should sell. I looked up the reasons for why THI had taken a pop on February 20, 2009. As it turns out, it was the market’s reaction to the earnings announcement.
I looked at the technical analysis indicators and made the comment that she did not have to sell if she wants to ride the up-trend momentum. However, she had already sold (and then asked me for my opinion on whether or not to sell!).
That’s okay, answering for nothing. I then proceeded to comment that it was good to take the profit and to try to get back into THI on a dip as part of a day-trading action. She retorted “Why should I do that? Why should I buy back in after selling it? Why would I buy so high?”
On the surface, the questions are valid (I used to think that way in my early years of trading). However, looking deeper, I submit that it is not a question of how high a stock is but how high it will go. And if there are reasons supporting a rise in the stock, then that constitutes an up-trend. The reasons for THI to go higher are:
- The earnings announcement results.
- The technical analysis shows an up-trend progression.
Even if one is not willing to risk buying back in at the perceived high level, that’s okay too. It’s the traders choice in risk-reward management. But then I asked “When will you buy back in?”. Her answer was a resounding “I don’t know”.
A trader needs a trend following system. Without it, there is little clue as to the entry and exit points which most likely means no trading profits.
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