Trend investing doesn’t sound much different from trend trading. Both work with trends, but the trend investor is the relaxed one.
While there may be different entry methods for trend investing, one thing should be clear. If the price is up from your entry, the relaxed investing phase has begun. From there on the trend investor is in waiting mode. Every other type of trend speculation is some sort of trading, e.g. swing trading in a longer running uptrend, which is also known as trend following.
For trend investing an investigation of the fundamental situation is therefore necessary. You are betting on a long term trend and only use entry techniques to cap losses. The hoped for trend will only materialize in the long run if there is some fundamental reason behind it. There must be a driving force other than the technical momentum during the entry phase.
Two things are important for trend investing:
Technical strength at the entry and a trading system that is also usable for trend trading, which means it has to have a mechanism to stop losses.
Fundamental strength that will statistically propel the price further in the long run.
Ahh, I hear you murmuring that the above is nonsense? Fundamentals are not important for a trend trader, because the chart has all information there is compiled into one fine piece of trading guide?
Just relying on technical forces that catalyze a trend is momentum trading. This works great if done right, but can’t be called investing. Just because one method works, another one isn’t invalid.
What about the former item, the stop loss system? Right, it could be done differently. Instead of waiting for momentum in the right direction to get on board and being able to execute a tight stop loss, an investor could do the opposite and wait for a larger pullback. In that case this sort of thing would be even more investing.
The problem with this “investing entry method” is twofold:
- The investor spots a trend, but would have to wait now for entering it. The best trends move ahead leaving our poor conservative old school investor in the dark. Waiting is poison for trend speculation.
- Right from the beginning of the trade the investor would have to rely on the validity of his fundamental judgment. This is highly problematic, as most long term expectations don’t come true.
Investing in trends means buying into a high price, with or without a temporary pullback, a technical congestion base, or one or two quarters of disappointments for a stock company. Having at the entry no stop loss system at work, means being an investor, but without buying cheap. The catastrophe is preprogrammed.
Seen from a different angle, the market produces trends, which means all the time of the trend the price potential got underestimated. The price for this fine thing is that in the moment the trend trader or investor is in, the opposite may turn true and the trend reverses.
Trend investing without some sort of stop technique is disastrous. The trend investor hoping for a second reversal of this misbehaved trend investment has to wait and will still incur large losses. This is the combination that breaks investors, at least psychologically.
As a conclusion, at the beginning of a trade a trend speculator has to be a trader. If everything goes right, the trader can switch his trading mentality into investing mode and ride the trend as long as the fundamental outlook justifies it.