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Alvin Toffler
You’ve got to think about big things while you’re doing small things, so that all the small things go in the right direction.
When do trend followers enter? After a trend has begun. As I mention in Chapter 1, trend followers have no ability to predict when a trend will start. The only way to know that a trend has started is when it starts to move either up or down. For example, let’s say Apple is trading between 100 and 120 for six months. All of a sudden Apple jumps, or breaks out, to a price level of 130.
That type of upward movement from a range is a trigger for trend followers. They say, “I might not know that Apple is going to continue upward, but it’s been going sideways for a while, and all of a sudden, the price has jumped to 130. I’m not in this game to try and find bargains or cheap places to buy. I’m in this game to follow trends, and the trend is up.” This approach is counterintuitive for many. One trend trader outlined the simplicity:
“As our systems are designed to send a buy or sell signal only when a clear trend develops. By definition, we never get in at the beginning of a trend or get out at the top.”
Ed Seykota lays out a basic risk definition from a trading perspective: “Risk is the possibility of loss.” That is, if we own some stock, and there is a possibility of a price decline, we are at risk. The stock is not the risk, nor is the loss the risk. The possibility of loss is the risk.
Volatility, risk, and profit are closely related. Traders pay close attention to volatility because price changes affect their profits and losses. Periods of high volatility are highly risky to traders. Such periods, however, can also present them with opportunities for great profits.
Trend followers don’t worry about what the markets are going to do tomorrow. They don’t concern themselves with forecasts, fundamental factors, or technological breakthroughs. They can’t undo the past and can’t predict the future.
But there is hope. If you study risk, you will find there are two kinds: blind risk and calculated risk. The first one, blind risk, is suspect. Blind risk is the calling card of laziness, the irrational hope, something for nothing, the cold twist of fate. Blind risk is the pointless gamble, the emotional decision, and the sucker play. The man who embraces blind risk demonstrates all the wisdom and intelligence of a drunk stepping into traffic. However, calculated risk builds fortunes, nations, and empires.
Calculated risk and bold vision go hand in hand. To use your mind, to see the possibilities, to work things out logically, and then to move forward in strength and confidence is what places man above the animals. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time. Trend followers thrive on calculated risk.