Trend Follower vs. Range Trader
Does your trading style fit you?
If you haven’t worked it out yet, our theme so far on this blog has been getting ‘you the person’ right before you begin your trading career, or if you already are a trader and struggling, giving you clear and concise ways to find out why you’re struggling.
The topic of this post is trend following vs. range trading. I’m writing this post because there is a big difference between the two and even more pertinent is that most traders are either one or the other. Rarely do you find a trader who does both.
The reason for this is that each style of trading requires different circumstances, different life styles, different mechanics, and different resources and so on. A trend following trader looks longer term where as a range trader is seeking more consistent returns, albeit it at the expense of having to devote a little more time. Range trading is also a more general term covering swing trading, short term trading, scalping and so on.
So why would someone choose one over the other?
One of the big trends we are seeing, especially in a recent survey we conducted is that traders are giving up on their dreams of big long term returns, and are just looking for more consistent results in their trading. They’d rather trade a system that delivers a consistent 5% a month than trading a system that may or may not produce a 120% return over a year. The latter system has a good potential for higher returns but the fact still remains that it may not occur every year.
But here’s the problem: Looking for a more consistent return requires more input and work from the trader, work most aren’t willing to do.
It is definitely true that if you decide to become a range trader you can seek out a more consistent result, simply because you’re not in the market as long with each trade therefore allowing you to place more trades within a shorter time frame. This idea works based on the probability factor. Simply put, place 20 trades within a month and get 12 winners you’ll be in front. Place 20 trades over a year and you’re going to have good months and bad months but generally a good year.
Also range traders are less likely to let profits run and more likely to set profit targets. This action alone deters a lot of traders from using a trend following system; as it has been said before ‘the hallmark of a successful trader is the ability to maintain discipline and stick to the rules during winning trades’. I personally think that the reason many traders seek consistent returns over longer term success is this fact; most do not have the discipline to let profits run.
Does this mean range traders don’t require discipline? Absolutely not, but it does point out that trend followers do look longer term and are not at all concerned with their shorter term performance of their equity curve. If you feel you can’t trade for the longer term and would rather feel the confidence that is built around a more consistent style, please be aware that it comes at a cost; more time on your part.
So who are you? Knowing who you are and your ability or inability to look longer term is going to go a long way to determining which style of trading you employ. I can tell you now though; a lot of traders think they know who they are until they come face to face with the markets and thus themselves. Those who have a true desire to succeed and win in the markets are those that have found who they are. That is the Holy Grail!
Happy Trading
Dean Whittingham
Elite Insiders Group - Trading Systems
Financial Market Fisherman © 2004 - 2007
