You also hold through all these market environments with no plan except: The market always comes back eventually. If you get out how will you know when to get back in? The lower the price you get the better for you long term. What are the problems with this philosophy?
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Buy and hold is useless as a stock market strategy. It never addresses the REAL issues for winning in the markets: Exchange traded funds or mutual funds? Managed funds or index funds? Buy and hold is not the Holy Grail of investing that Wall Street and the mutual fund industry has made it out to be. There are also many times that a buy and hold investor can make zero profits for a decade based on popular indexes.
One quick example is the first decade of the 21 st century from , a lost decade for any returns. The Dow Jones Industrial Average closed at 11, points on December 31 st , and it closed at 10, points on December 31 st , An entire decade where buy and hold investors road quite a roller coaster of ups and downs for no returns from capital gains if you were holding this index as an example. The Dow Jones Industrial Average close of 96 points was not permanently eclipsed until 28 years later in Yes, that is a crash from to 41 points in the DJIA. Buy and hold advice would have been just to hold on, it will work out in the long run, and stocks always go back up.
That would have been a ride that not many of the toughest professional money managers could have made much less the average investor. The problem with buy and hold is that we have a limited amount of time to make our returns, when we are fortunate to participate in a great bull market we have to have a process for locking in those gains in the short term and wait for the next bull train. Another example is that the Dow Jones Industrial Average close of was not permanently broken until 17 years later in The DJIA would spend 17 years fighting to break over the 1, point resistance level.
That is another 7 years of no returns but lots of risk. Another element for consideration is the destruction of buying power of your money while you are waiting a decade or two to get back to even in your investments.
As the government continues to print dollars it creates inflation as more dollars keep chasing the same amount of goods. Currencies lose their buying power over the long term when the amount circulating increases continuously. His view could not be any farther from the truth. Many people made fortunes in with solid moneymaking strategies.
The winners were not doing anything wrong, they just happened to have had the vision to prepare for the unexpected, and when the big surprises unfolded they cleaned up. Many of the people that had profitable years in were the ones trading the trend of the price action in the financial markets. Investors and traders that had an exit strategy to lock in profits in also avoided much of the downtrend that ensued.
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The buy and hold philosophy does not have an exit strategy based on the trend of price action, trend traders do. Buy and hold investing began to be accepted after the bull market run based on hindsight and recency bias. Then the recent recovery from the lows back to the highs in the stock market reinforced the just wait it will come back mentality. Investors fail to understand that there is a better way. Riding a roller coaster up and down to break even is not the only way to invest and trade in the stock market.
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Trend traders trade the current trend in the stock market. They find ways to quantify buying positions in markets that are going up and even selling short in markets that are going down. Their profits come from trends and they search for entry signals into trends across many markets. They can make money when the market goes up or down, they are not at the mercy of the market.
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Investors have been conditioned for decades to believe that they cannot beat the market. I have news for you: That does not work. We have all seen one market crash after another for the last decade. But the powers that be keep telling us that the old investing ways are the only way. Trend following is a new way of thinking, a new way of making money that is entirely different from what you have been taught.
It varies vastly from what you have heard from the brokerage firms, the media, and the government. Digging for trend following trading lessons is my lifeblood. Plenty of people write books telling you that they know what will happen tomorrow. Do you really want to bet on the words of people who say they know what will happen tomorrow? When personal computers advanced we bought the latest.
Of course now you can do the same things much faster on a laptop. But that was then and this is now. I read every book I could get my hands on about trading. I listened to the old traders. When I worked during summer breaks in college at a brokerage firm at the Chicago Board of Trade I kept my ears open as the old timers related their adventures, their successes, their failures. I tried to understand the psychology of the winners and how it differed from the losers. I got the idea that the psychology of the trader was as important if not more important than anything in success or failure.
I spent a lot of time learning things the hard way, a lot of trial and error, a lot of hard knocks. Trading is still a lot of hard knocks. Drawdowns can go on seemingly forever. You can have days, weeks, even months on end without much in the way of profits. It can feel like you are a punching bag or a movie double who takes all the hits. But that's the nature of the game, of the business.
Even after you've learned how to do it, you still take your hits. To succeed you just need to stand up every time you get knocked down. You need to have the confidence that standing up is the right thing to do.
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You need to know when to stand back up and how. And just by standing up again and again and staying standing as long as you can before you get hit again, well, you can actually make more money than you lose over the long run in trend trading. It's quite the amazing process.
Very few people succeed in this process. The learning curve is too steep and the correct psychology is too hard to implement. If you have any attachment to making money, and who doesn't, it is very tough to trade correctly. This brings me to the book you hold in your hands. I surely wish I had it 30 years ago. It would have saved me a lot of work. And I would have made more money, especially in the early years.
More specifically I would have lost less money and that would have put me farther ahead today. Andy Abraham has written a gem. His writing style is enjoyable, clear and entertaining.
He covers all the main ingredients needed for successful trend trading. He tells the truth. What impresses me most about Andy's writing is his honesty. He doesn't sugar coat things. He doesn't tell you it's easy to make money. He tells you that you need patience and discipline. By the way "Patience and Discipline" has been Tactical's slogan since its inception. Andy tells you drawdowns and losses are part of the business. He presents a track record of one of his own programs that he started just a few years ago that has not made new highs in 17 months.
That's exactly how it works sometimes. What is so refreshing is Andy's honesty about it. The man has integrity. A characteristic of those traders who have been successful over many years is honesty with respect to their trading. You need to understand your own psychology, where you are mentally strong and weak, how you deal with baser emotions, particularly fear and greed. If you lack honesty with yourself you will almost certainly fail.
Andy's honesty, more than anything, tells me he understands trading psychology and gives me confidence he is qualified to teach others what he knows. I have yet to run across a trading book that emphasizes the psychological aspect of trading better than this one. This book is not a cookbook. It does not outline a mechanical system.
It explains the psychology needed to succeed in trend trading, gives some examples of traders who have applied it and sets out the underlying principles which should be followed for success-- trade the best markets, trade with the trend, bet small, use stop losses, cut losses, ride winners, don't overtrade, be patient, be disciplined. As a bonus, Andy gives you the scaffolding for a particular methodology that works for him as an example of everything he sets out in the basic rules.
Just as you would never think of moving into a new house that has been framed but before the roof, walls and interior are finished you cannot and should not attempt to trade Andy's "system" without doing all the finishing carpentry. You need to do your own back testing--doable these days with off the shelf software he describes--to fill in the parameter values and to learn how his trade-the-best market portfolio ranker shuffles which market signals you take. For those who don't have a clue where to begin Andy gives you his exact pattern to follow.
Your own back testing fills in the parameter blanks. Andy advises everyone that they must trade a style that fits their personality. I believe very strongly he is absolutely correct. You will not follow a system that does not suit you. In his wisdom Andy thus does not give you all the parameter values for the formulas in his personal trading scaffold.
He wants you to do your own back testing, to find a methodology that you are comfortable with yourself and have confidence in. When all is said and done your approach may be identical to his with your own parameter values. It may be significantly different.
Regardless, you cannot develop the confidence to pull the trigger after multiple losses in a row without having done the work yourself. It's a fair bet to say that any trend following methodology likely to succeed over time will employ the general psychological and fundamental trading rules Andy outlines.
The specifics of everyone's approach will vary, but the broad principles outlined here will be present in one form or another in virtually all robustly successful trend following approaches. People say that markets have changed and new rules are needed for the new game.
I've heard that for over 30 years. The markets do change but the underlying fundamental rules for success don't seem to. They are all outlined here. You are lucky to have picked up this book.