Trading with TrendLine Dynamics Charts

Objectives

With our system, we are not trying to find bear market bottoms or bull market tops. Bull and bear markets are like ocean tides, prolonged rises and falls. It is useful to observe what kind of long term market we are in so we know what style of trading is appropriate at any given time. However, we are not trying to profit from the tidal shifts. We are interested in the short-term rises and falls, the waves. Like surfers who sit outside waiting for good waves, we sit and wait for high probability entry points.

Our basic objectives are to:

  1. Use end-of-day data to locate the start of upswings in upward-trending securities
  2. Qualify potential trades by evaluating accompanying conditions in individual securities and the market as a whole
  3. Enter trades with buy orders to be executed when the market opens the following day
  4. Protect profits and limit losses by using stop orders
  5. Hold positions for several days or weeks until the upswing ends
  6. Close trades with sell orders to be executed when the market opens the following day

There are details that expand on the execution of these points, but these express the essentials of our approach to the markets.

Most investors compare their performance to a benchmark — e.g., the S&P 500. They believe they are doing well when they are doing better than their benchmark. Measuring your performance this way is called relative return. From the top in 2007 to the bottom in 2009, the market dropped over 55%. So as a relative return investor, if you only lost 35%, then you should be happy because you beat your benchmark.

We believe it is more meaningful to measure performance by absolute return. As such, our benchmark is zero. If our returns are consistently above zero, then we are doing well. If our returns are below zero, then we are not doing well. We do not use the market to tell us how we are doing. We use the market and its continual wave motion to capture short-term profits. We scan the markets every day
looking for high-probability entry points and use position sizing and exit discipline to capture profits from market price movements.



Continue to the next article in the series: Basic Concepts

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