Start Your Hedge Fund With Trend Following
Hedge fund managers have one advantage over individual traders: they’re paid to trade. That’s not always the case for most traders, who have jobs (often full-time) to bring in money for their day-to-day living expenses, as well as save money for their trading activities.
With all that time, hedge fund managers can research and monitor the market. With all that money, they can hire people to research and monitor the market for them, while they play a few rounds of golf and shop for art.
For the individual trader, things are different. Many strategies that suit their lifestyle, won’t fit their dreams. Buy-and-hold is too slow and day-trading (without the ability to constantly manage the trades) can be too risky.
However, individual traders can use trend following strategies to compensate and compete with hedge fund managers.
Trend following techniques are considered high-probability strategies for successful trading. Basically, it means that what goes up has a tendency to go up. Until it goes down. And when it goes down it has a tendency to go down. The trend follower finds these moves and rides them until they die out.
Most hedge fund managers utilize some aspect of trend following. The Turtle Traders are some of the most famous examples of trend followers. That group spun off a whole trading floor full of fund managers.
But, you don’t need to be a hedge fund manager to use trend following. Trend following actually is common sense trading.
The steps include:
Select an entry point. You want to enter a position in an asset that has made consistent and strong moves. (The move can be in either direction because, as we’ll learn, hedge fund managers can make money in market neutral ways.)
Cut your losses, but let your profits ride. Traders hate to take a loss because it means (they think) that they failed. So, they hang on to assets they hope will miraculously move in their preferred direction. By taking small losses, trend followers can channel their money into winning trades.
Manage your money. High risk can lead to catastrophic losses. Trend followers learn to choose their battles, preserve their capital and learn to fight another day.
Use technology. Hedge funds bristle with new technology that they use to gain an edge in the market. They’re there for you, too. One example of this is trend following tools. INO, one of our partners, produces technology, like the Trend Analysis tool, and informational products like INO TV.
Tomorrow, we’ll discuss another tool for would-be personal hedge fund managers: Automated Trading. If you’re new to the series, you can read the introductory post, How To Start Your Own Hedge Fund.
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