How to get early on board of a trend? This could be one cardinal question for trend trading, of course depending on the view point, meaning the trading system. The short and simple answer could be just to wait for breaking news that has price appreciation potential and jump in.
There are more advantages than one with this strategy. We have here a system that melts day trading and trend trading. Get in as soon as there is some interesting news and decide later on, e.g., during the trading day, whether to hold or not. News trading is a day trading strategy on its own. Do it with a stop loss at the level before the news broke and it is probably one of the simplest approaches in trading that there are. And it works quite good!
Combined into a trend trading system, it could solve the old problem of being able to stop out of positions, but not by paying too often a too hefty penalty – for being wrong. The current news is the short term motor that fuels statistically the trade to march on in the right direction. But it can be more. At a first glance the market often underestimates the impact a piece of news will eventually have. In the first moments it is simply spoken unable to interpret the new correctly.
This misinterpretation of the new situation is the foundation for more price advances. An ongoing lack of understanding what the news really meant causes the long term trend then.
Basically the old school investors with their efficient market hypothesis meet here with modern momentum traders. At least as far as this is possible – efficient market investors should neither invest at all but should be stunned and baffled by every single trend they spot. According to their doctrin, prices shouldn’t move at all with the exception of a slow rise equalling pure interest investments.
What is the downside of this news and trend trading system? Because it is betting on a forming trend, it is for momentum traders and those are not patient. They want to have action – first price action and then immediately after that trading fun. For this system they would have to wait and if the market starts, but no news is in sight that could be the day trading trigger, frustration may set in.
Waiting is generally not the right thing to do in trading – for psychological reasons. You lose the sync with the market and more important, you begin to misjudge things, seeing buying chances where there aren’t any or vice versa, becoming to lethargic or anxious to enter the market.
Still, this trend-news-system combines the quest for short and long term potential, resulting in a short term trend embedded in a longer running one. It is the more pragmatic version of the system that tries to enter the market before there is a trend.