December 5, 2020

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Two popular terms which often confuse investors are "trend following" and "momentum investing." Possibly the most glaring commonality between these two is their blatant defiance of "buy and hold," the practice of selecting an investment and holding it indefinitely, believing that with time industry rises, and therefore any investment will appreciate. Even though buy and hold approach has been touted for years by academics as the best approach to investing, in fact it has its shortcomings, which are apparent in most Bear market. خرید فالوور اینستاگرام

Despite being the antithesis of buy and hold, both momentum investing and trend following strategies are predicated upon a disciplined investment approach that's designed to purchase when the price of a concern is increasing and sell when the cost is declining. Additionally, an exit strategy is normally incorporated to override the human tendency to hold losing positions much too long. Yet inspite of the distinct characteristics that those two terms share, the truth is they're quite different.

What is Trend Following?

Trend following, in its most elementary definition, is a systematic investment approach predicated upon buying and selling securities on the basis of the sustained price movement of the issue. It's important to point out that trend followers don't predict the future price movement of an investment; rather they examine the problem using technical analysis to find out which direction, if any, the equity is moving. If a bullish trend is emerging, the trend follower will more than likely buy a position in the stock and hold it until the trend begins to weaken or change direction. If the equity exhibits a bearish trend, the trend follower can short the career, wait before the trend reverses, or merely find another issue.

But there's a lot more to being a successful trend follower than simply selecting and buying securities. In fact, it could be argued that the most crucial part of trend following isn't when and what to buy, but rather when and what to sell! Sometimes, successful trend followers set up a "sell rule" that really must be violated ahead of selling the issue. These sell rules vary with respect to the risk tolerance of each investor, nevertheless they typically contain a trailing stop loss along with a confirming indicator. The overarching advantage of sell rules is that they give a disciplined, mechanical methodology which the common investor should seriously consider implementing into his investment philosophy.

What is Momentum Investing?

Momentum investors are constantly trying to find companies which are moving faster compared to the market. They believe substantial returns can be realized should they find, buy and hold onto those issues for so long as the purchase price continues to go up. The old axiom, "if it isn't broken, don't fix it" illustrates the shared philosophy of momentum investors; those companies with the largest price changes over the last several months are prone to continue making substantial gains. Fundamental analysis plays a much bigger role in momentum investing than it does in trend following. Momentum investors think that buried inside a company's earnings statement is the reason why the purchase price has been increasing so dramatically. And if that underlying reason is uncovered, the chance presents itself to capitalize on that knowledge in the future.

In case of trend following, investors desire to identify where a security might be within the performance cycle. For example, how close to the 52-week high or low is the existing market price and what is the short-term direction of the problem? For the momentum investor, the important thing criteria may be the relative strength of the security versus the market or maybe more importantly the peer group of the particular security in question.

How to Produce a Successful Investment Strategy

Investors often ask why go through all the effort of actively managing a portfolio. The easy answer is based on the proven behaviors of economic cycles and sector rotation. Independent studies have proven that as time passes the largest percentage of a securities'price appreciation is driven by the industrial group within which the organization is classified and not the performance of the person company itself.