Will Trend Following Still Work for 2008?

[thetrad3r]

Over and over again we have heard a story of zero to hero, how trader with small capital often few thousands of dollars can end up in hundreds of millions of dollars or even billions of dollars net worth.

However at a current time, market has been filled with uncertainty we never have seen before. The tendency of global growth toward inflation and recession in US have made what George Soros called "wealth destruction time".

This "wealth destruction time" has produced many false breakout, which is important component in trend following concept, in wide ranging market since early this year.

Based on that premise what do you think the fate of trend following concept this year? Will it still work? Or will it total failure?

[Derringer]

Trend following works and will always work in the long run. Why? Market is made up of bulls and bears. Trends are the outcomes of greeds and fear. If you watch the history, no stock market is always trading within a particular zone or channel. There are always consolidation, breakout, trending, reversals. It's just the nature of the market.

It's similar to the economy. The economy always undergo four stages: expansion, prosperity, contraction, and recession. Everyone was gloomy about the future in the Great Depression in 1929 in the United States. Some even thought the United States was over. However the United States managed to rise again.

Trend following works and will always work unless there is a fundamental change of the crowd's psychology and market structures and operations.

[Syprik]

I believe 2008 will be range-bound, with little significant trend. Less trend, less efficient mechanical/automated strategies become.

[trader08]

Trend following works well in bull markets, bubbles, and the after effects of a bubble.

The major stock indices are in a multi-year consolidation pattern. These are not good for trend following.

However, most commodities are in bull markets or small bubbles. These are excellent for trend following.

We've likely got a few more years of commodities moving, so it's basically wait for one to get active, jump on board, and wait until CNBC starts talking about it every 30 seconds.

[nilu_2005]

It will always work. But we have to caution about some facts which will decide global market trend for long term.

1] Rising Crude Oil
2] Rising Inflation

Out of that, rising crude oil prices will always key concerns for Emerging markets like China & India. I watch on our economic TV channel CNBC AWAJ , That India got large amount of buying activity by FIIs from 2003 . Now till 2008, FIIs sell around 60% of money. So 60% of money is out of Indian markets. Indian market will be in rangebound condition till Dec 2008. As far I know about US markets. Dollar gaining strength again. So us markets definitely going up again.

Rising inflation has long term impact on our global markets. I think at start or middle of 2009 this problem is solved. As Indian monsoon is come at the right time, Their will no problems of food shortage next year. As India is major exporter of commodities.

So at the end, we can benefit from both type of markets. Provided that we should follow the trend in 2008.

[Fibson]

There is a perspective issue involved here. There has never been an end to trend! At any given time, a pattern is in play (at least in the eyes of a few). Markets do not move in a straight line and essentially are either moving up or down, even when they are "range bound". The individual constituent markets can be in a number of phases as explained under elliott wave and fibonacci studies. The perceived general lack of trend precipitates when almost equal number of markets are moving in opposite directions. For example, whereas oil is on accendency, the stock indices have been retracing. So also gold has seen some rise while dollar and pound have mainly fallen.
In the light of this scenero, an informed trader will still do what ought to be done: folllow the market! The main issue then is what tools the trader uses. Essentially, the right tools are supposed to tell the trend all the time. One of the commonest tools which every trader has access to is the inter-relationship between time frames and volatility. This may be what is subtly changing. Trend becomes more evident as you drop in time frame. However, that same move increases the volatility on the chart for that market and for most people, the tradeability of that market. To find trades, these traders have to move to higher time scales where there will be less volatility but then, less clear a trend.
What seems to be happening is that for some markets, the time frame for obvious trend has changed either downwards or upwards. So methods that were fantastic a while ago, are shorting the capital rather than growing profit. To these, I suggest back testing their method on recent data at several time frames. To those who have not even reached that point of pulling profits from the market, I recommend that they go back to the most important part of trading....knowing the trend. They should spend all the time necessary time to find out how to tell the trend...the trend is always there at some time frame!
Therefore in terms of perspective, the long term trader may look for another market that is now trending at long time frame or drop down to lower time frames to find the trend for the current market of interest. Same follows for the day trader who has always found joy in a particular market till of late. Market might have started trending at too low a time frame to trade....adapt or find another market that is trending at the time frame ... volatility you are comfortable with.
One last ditch option will be to wait it out as markets in conforming to not moving in straight line, end up coming back to trend in their "usual" time frame and volatility combo. So be it 2008 or any other year...go look for trend!