With trend investing you are reducing the element of gambling on a potential future result. Instead you are living and making your investment in ‘real time’.
The basic idea is that once a trend is established either upwards or downwards for a fund or sector, it is more likely to continue in that direction than to move against the trend.
In other words, the price of an asset gains a certain ‘momentum’.
In physics, momentum is the force possessed by matter in motion. It’s the product of the mass and velocity of a body. And we can make an analogy with investing.
The greater the money that is being invested into a fund or sector, the quicker its value will rise and the greater impetus it will acquire as it attracts more and more investors. For a time its rise will become self- fulfilling. Obviously the opposite applies when a fund or sector loses investors, and the momentum is downwards and the price falls.
Jesse Livermore, the legendary trader from the US in the late nineteenth and early twentieth century, explained it as follows:
“When a stock is going up, no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep going up; as long as it does so with only small and natural reactions from time to time, then it is a buy.
After a steady rise this stock levels off and turns down with only occasional rallies; it is obvious that the line of least resistance has changed from upwards to downwards. There is no need for explanations. Now is the time to sell.”
I liken trend investing to going to a horse race and being able to switch to the leading horse as the race progresses. You are in the best possible position throughout, and you will win at the end. In other words your money is always earning the best return that prevailing conditions will allow.
In summary, value investors will try to buy low and anticipate selling high. The trend investor will buy high and sell higher whilst riding with the herd.
Personally I would rather be buying something that is working today rather than the hope that it will work tomorrow!
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