To lead, or to follow?

I am not talking about personality traits, but rather trading styles.

There are risks and rewards associated with both styles. I will very briefly touch upon the characteristics, so that you can get a better idea of which trading style will fit you best.

A leading system is one that is more of a contrarian approach. “Buy fear and sell greed” is one of the common mantras of a leading system. Often, an oscillating type of indicator is used for the buy and sell signals, along with aggressively buying support and selling resistance.

The advantage of a leading system is that you get into (or out of) a position early, keeping a high majority of the gains for the move made. A leading system is very good for a choppy market, or one that moves up and down in the same range over and over.

The disadvantage to a leading system is the number of false signals that you can get. For example, the daily chart may give warnings that the upward move is ending. You can become overly aggressive by trying to sell the very top, but the signal may be too early and the next day the price can snap back up and cancel the sell signal. With a leading style you would want to use a fairly tight stop, so when a situation like this occurs the “damage” will be minimized and it will be just a small loss and will not turn into a large loss. I don’t know how much more I can stress the need to set and honor stops. If you can’t or won’t do that one step of the process, then you are going to be in very big trouble. As a market continues to move “against” a signal, a small loss can turn into a big one if a stop is not set and then honored.

Due to the very tight stops that are associated with the more aggressive leading style, more trades will be entered, so it does drive up the trading costs. You have to be able to change your bias almost at a moments notice. This reminds me of a statement made by Keynes: “When the facts change, I change my mind. What do you do, sir?”

A following (or trailing) system is one that better corresponds to the following attitude: “You can have the top 20%, and the bottom 20%, but I will take the 60% in the middle.”

A following system is one in which you do not try to enter at the top or bottom. Once a trend is identified, you stay with the trend until a loose trailing stop is hit. The reason it is a loose trailing stop is that you want to stay in the position until a new trend has developed in the opposite direction. The trend can be a traditional “higher high & higher low, or lower high and lower low” or it can be a moving average cross-over, or based on a following indicator such as the MACD indicator.

The main advantage of a following system is that you have fewer trades, and when a strong trend develops you can ride the trend and “let the winner run” as you are not looking for a top or bottom and allows you to ride out the smaller term “wiggles”.

The disadvantage of a following system is when the price is trendless, range bound, or making small moves. When this occurs, and you use a following system, you often wind up buying the middle and exiting at a loss at the top and bottom.

There are advantages to both styles, and also disadvantages. It depends on the situation and time frame that you are looking at as to which style would be “better” than the other. Which brings me to the Time Frame Analysis and the custom charts that I use. I spent years creating and testing all types of different indicators and formulas. The Time Frame charts are the result of that work, and incorporate characteristics of BOTH types of styles, and the power of these charts is apparent when you look at the multiple time frames.

Every situation is different, and the Time Frame Analysis with the custom charts found at TimeFrameInvestor can help you decide which trading style is right for you. The Time Frame Analysis can also help you identify which positions can help you achieve maximum results using your trading style. See how you can benefit from all that TimeFrameInvestor has to offer.

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