Trend Following

The opposite of bottom (or top) fishing is trend following. Rather than betting on a falling price reversing, you bet on a rising price continuing to rise; or a falling price continuing to fall. The trick with trend-following is to buy on the counter-trend dips but in the direction of the major trend, as shown on the following chart.

It is easy to see how buying the FTSE index at any or all of the marked points between July 2010 and February 2011 would have been profitable. But beware: the trend is your friend only until it ends!

The following chart shows how betting in line with the FTSE rising trend between 2004 and 2007 would only have been profitable providing you sold out (or even sold short) when the trend reversed and the price broke through the rising trend line.

This is a good graphic example of how blindly “buying and holding” (as many investors do) in the face of adverse price action may be futile… and even downright dangerous.

Bottom Fishing and Trend Following Combined

My own personal approach to position trading is to combine bottom fishing with trend following. In the combined approach I would establish small exploratory positions in stocks that I think may have fallen too far and are about to reverse, with a few to pyramiding those positions up to meaningful stakes in line with the rising trend when it becomes apparent.