Trend Timing - Let the Trend be your Friend
"Let the trend be your friend" is a much quoted stock market cliché. But even if it's a cliché, it's definitely worth remembering.
Sometimes, if you can ride the trend of a share, you can make a decent profit out of it. So, if a share is gradually scaling upwards, it may be worth joining the crowd. Or, if it's going down, it could equally be a good time to short it.
If only if it was as simple as that. We'd all be millionaires and no-one would ever lose money. The trouble with a trend is knowing when to jump off. That's really like anything in life. Flared jeans were a trend; so were platform shoes - but they went out of fashion. And the same thing can happen to shares. You've got to get out before the trend changes.
In 1999, the trend for tech shares was very much up. Buy any tech share and ride that upward trend, and you would have made serious money. But by early 2000, the trend ran out of steam and began to reverse quickly and sharply, leaving many investors out of pocket.
So the trick is to try and spot the trend soon after it has started, and depart just before the trend changes and reverses.
That's a neat trick and I really wish I could pull it off every time! The fact is, it is not possible to spot the start of a trend and the end of a trend. The secret is to try and ride at least part of the trend - not all of it. If you try to catch exactly the top and bottom, you'll come a cropper.
When Rothschild was asked how he got rich, he famously replied, "by buying too late, and selling too early". His message: don't try to time the top and bottoms of trends. What you must not do is try and fight a trend that's been established. Don't try and be clever and go against it. And don't try and find the bottom or the top of a trend and call it before it happens. Be patient. Let the other chap grab a few of the points if you want - it doesn't matter.
So why does following a trend work?
Because man is a pack animal. And man (and the occasional woman) tend to all pile into shares at the same time and pile out too. Market traders find it hard to go with the trend because, naturally, traders are often mavericks and would rather be contrary. But, over the long-term, I don't believe it's wise to fight the trends.
For example, lots of investors - including me, thought the FTSE was a good short at 4900. "It's gone up far too much!" we probably all thought. "Time to short." Of course, as we know now, the FTSE has continued in an uptrend. Say it goes to 5,500 - I would still not like to call the top. I would rather miss a hundred points than try and fight the trend again.
Most shares are still trending upwards at the moment. Can this last? It certainly looks like it, at least short-term. But I would consider taking profits quite soon in some stocks because, although I might miss the top of the market, I may also miss a sudden slide.
Top marks from my portfolio this week for Burren Energy (trebled my money nearly), White Young Green, and Galliford Try - all trending higher. And Delta looks like it could go well. There have been some big trades going through over the last few days, so as well as that one being in a strong uptrend, methinks there is something afoot!