Michael Marcus turned an $30,000investment into $80 million.
He loves the technique I'm about to share with you.
And he's not alone.
Bruce Kovner manages a $4 billionfund . He swears by this, too.
So does Kenneth Tropin, who earned $120 million in 2008.
Do they all invest in the same type ofstocks or commodities?
Do they share a secretinvesting trick known only to the
ultra-rich? Well, the answer to both guesses is no.
What these multimillionaire and billionaire investors have in
common is that they all practice the same investing technique.
And here's the best part: The technique is neither difficult nor
only limited to the largestmoney managers. In fact, it's a common
and easy-to-use investing method that anyone can replicate.
If you haven't already guessed, the investing tactic I'm
talking about is called trend following.
What Is Trend Following?
This is an investing method that takes advantage of long-term
moves in stocks and commodities. It can be used effectively on
the long and short side of anymarket or instrument. Think ofbuy
and hold , but with rules on when to buy and sell.
Trend followers wait for a distinct uptrend or downtrend to
appear on the price chart, then they enter in the direction of
the trend. An uptrend is defined as a series of consecutively
higher highs and higher lows. Whereas a downtrend is defined by a
series of lower highs and lower lows on a price chart. In most
cases, trend followers use a daily price chart and either buy
into an uptrend or short into a downtrend. New highs or new lows
are often the trigger to enter the investment.
But other investors (including myself) prefer to wait for a
pullback from the highs to enter in the same direction of the
longer-term trend. The reasoning is that the lower price of a
strongstock will attract institutional buying interest. Trend
followers believe that the price momentum will continue either
higher or lower after a breakout or pullback.
The Key To Protecting Profits
The old saying "the trend is your friend until it bends in the
end" is apropos for trend following.
The facts are that even the most skilled and knowledgeable
trend-following investors don't know whether the trend will
continue after the investment is entered. The trend could end
immediately after you buy or short. The short-term pullback from
the strong upward trend could, in fact, be the start of a new
downtrend rather than a short-term pullback.
This unknown is why stop orders are a must when trend
following. Unlike buy and hold investing -- which trend
followerscall "buy and hope" -- trend following requires the use
of stop orders to prevent excessive losses. Where the stop orders
are placed is a personal choice. Placement is a function of your
personal risk tolerance. In other words, how much of a loss will
you accept before closing the position and trying
I like setting stops very close to the entry level. Then, if
I'm stopped out, I try as many as three times to catch the trend
before looking at other opportunities. The big-time trend
followers do this across a variety of stocks, commodities and
currencies at any one time. Basically, they enter positions,
close the ones that do not profit, and let the profitable ones
move higher or lower depending on the position being long or
Many profitable trend followers use trailing stops to protect
profits as they accumulate. Atrailing stop automatically remains
a certain distance behind the advancing price and will close the
position should theprice change direction, in an effort to
protect the profits.
This is just a brief introduction to the trend-following
investing method. I recommend Michael Covel's best-selling book
"Trend Following" for a comprehensive explanation of this
Here are three stocks in strong upward trends, along with
illustrations of how a trend-following investor would likely
enter the position.
1. Coca-Cola Co. (
2. LinkedIn Corp. (
3. PowerShares DB US DollarIndex Bullish Fund (NYSE
Risks to Consider:
Although a proven and highly effective investing method,
trend following can also be frustrating and risky. Buying on
breakouts can easily fail, as no one knows how long a trend will
last. In addition, buying pullbacks from a trend also has risk
since the pullback may be the start of a new trend.
Action to Take -->
Locating strongly trending stocks and buying on breakouts or
pullbacks is the core of trend following. Always use stops and be
ready to close out a position if it goes against you. Remember,
sometimes it takes several entries at a level to catch the
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