Trend Sigma – Stock Trading System

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Trend Sigma - Stock Trading SystemFinancial markets are basically a zero-sum game. Everybody tries to win, but the cake is not infinitely big and the market adapts ghostly to the group of winners that has become too large, leveling their advantage down.

Yet, for a small minority there is a way to consistently escape the crunching mechanisms of the markets. In order to get an impression of what that could be, let’s have a look at a chart of one of the recent stars of the stock market:

During its steep ascent the price of Hansen Natural’s stock got multiplied by a factor of about 100 in a matter of only 3 years. This is of course hindsight and I presented on purpose an impressive example, but the chart demonstrates something.

It shows directly that you could have made hundredfold back of what you invested. Stocks often have large moves, much bigger than the ones of commodities or currencies. But at risk would have been only the investment itself. This asymmetry clearly favors stocks over all other financial instruments. Their leverage is no compensation for the asymmetric price behavior the stock investor enjoys. Trading on margin with Forex or futures can let the account go below zero, which is simply a linear and not a logarithmic growth behavior. Options have a premium that decreases over time, which destroys the advantage their non-linear pricing pretends to offer at a first glance.

But there is something else. The multiplying happened with a trend that went straight up and was almost always at its current high. In such a situation the market forces that are playing against the small trader are diminished….

Most traders, and investors even more, are not aware that a price at the high is a different situation than a price elsewhere. Generally, it is a signal for more of the same to come and not for a retreat, as it may look to so many. It is an exceptional situation, indicating that there is a force hindering the price to swing back, which it normally would do.

Still, trading is what it used to be, a statistical game. There are situations near the high where the odds are skewed to your favor, but you must be able to identify them and to behave methodically. In other words, to exploit this exception, a trading system is necessary.

It is a trading system for the stock market that is trying to take advantage of longer-term moves of stocks. That does not mean that only long-time investments are put on. Chances for swing trades are also more likely found and successfully executed within a longer lasting upwards move or a relative price strength in a bear market.

At its best a stock gets held for many month, but only few trades will make it that long and so typical holding periods are starting from one day, commonly lasting a few days up to a few weeks. Trades are not conducted to be swing trades or longer investments, instead a position is held as long as it makes sense – the market decides, according to the rules of this system, of course.

Often trades can be executed automatically with a suitable limit or stop order. Depending on the situation this may hold true for entry and exit orders.

This system can be applied also to ETFs and more generally to everything that is traded on stock exchanges.

Possibly interested in this system could be trend followers and swing traders, but also investors who want to pursue a more active approach in the market. It may… Read more…

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