Why Trend Trading Is So Effective

By Barry Burns

Part of Trend Trading For Dummies Cheat Sheet

Trend trading is a common and long-standing approach to trading for good reason: It works! Following are some reasons why, so you don’t have to blindly accept the premise — and also because understanding why can give you the confident mind-set required for successful trading.

  • The “whales” control the market. The markets are priced-based on an auction model of bids and asks and buyers and sellers, so logically the big fish in the sea (the market participants with the big money — pension plans, mutual funds, banks, hedge funds, insurance companies, and other institutions) create the big moves in the market. This isn’t implying that they’re doing anything illegal; it’s simply a matter that large amounts of money invested in the markets cause them to move. If one market participant has a lot of money, it may be able to move the market by itself. As a group, the big-money players have even more market-moving power.

    Trend trading (also known as trend following) is one of the easiest and most reliable ways to make money in the markets because you’re following the leaders (sometimes called “the smart money”).

  • Trend trading is one of the simplest approaches to trading. The world of trading has become increasingly complex, causing many traders to suffer from information overload. From an endless number of trading systems, indicators, automated computer trading programs, and trading theories (with more being created every day), new traders often feel the need to study everything available. As a result, they become overwhelmed and confused.

    Trend trading is a simple approach to the markets that doesn’t require a lot of fancy technology or an intimate knowledge of mathematics, geometry, or market theory. Therefore, trend trading is one of the simplest approaches to trading.

  • Trend trading has stood the test of time. Documentation of trend trading dates back to the 19th and 20th centuries, and it continues to be popular to this day. One of the most famous trading experiments ever conducted, gathering a group of students with no trading experience in an attempt to turn them into successful traders (the “Turtle Traders”), was used with a trend following approach.