Trading with a Trend Following System

A person 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 (1) the earnings announcement results and (2) 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.

Comments are for informational purpose only and do not constitute stock trading recommendations.

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