Beat the news junkies: use order flow

With the markets ever increasingly becoming news junkies it’s becoming more and more interesting to see that trend following seems to be back in fashion. The concept is almost counter-intuitive; news “gorging” surely results in violent breakouts and reversals.

Although this is correct on a short timeframe, what we are seeing at the moment is periods of chop, typically around holidays and lower liquidity, rather than constant sustained trends. This is where order flow really helps.

Although it won’t do that well in low volatility, crucially it won’t lose much as it runs positive equity until trends reverse – then it books profit.

This typically means it will either just simply hold a position with the current trend or play the shorter breakouts for minor gains in choppy markets, whilst in defined trends it will continue to hold the majority of the position until the trend reverses.

Now this does have another impact with our positive equity systems, in that the overall gain in this process is booked on redemption and a full mark to market.

The savviest of our investors never do this; and never get billed for it. I think we could see this new world continue for some time to come given the way the markets are. With that in mind, I suggest you counter trend traders – anyone suggesting top and bottom picking techniques (you know, all those that did OK in parts of the financial crisis) should brace yourselves.

This then brings me onto the long-term strategy.

See we typically take at least 10 years’ worth of performance data and, despite the odd year that may not perform as well as others, in everything we have done on order books it all seems to point to the fact that the best strategy remains one of following the trend.

As Buffet always says: for the average investor, the best approach is simply to buy and hold.