Seems obvious, but people do confuse them. Here is an example.
A few years ago, a solid company with a good reputation was selling a lot of products and was very profitable, yet those facts were not reflected in its stock price. At the same time another company, a new entry in the same very competitive market, had thus far not made a profit, yet saw its stock price soaring.
WHY?
The simple answer is EMOTION. Let’s face it, Emotion drives the market. And Emotion can drive the Market in either direction. The two companies in the example above are Ford & Tesla. There are numerous other examples, especially in the tech and internet space.
The Trend Follower is always looking for a trend, whether it is the result of emotion or performance. Remember, once you make an investment in a stock, you must have a trend in order to make money. It is safer to buy into a trend and take that advantage, than to buy a stock that is not performing and hope it will begin to trend. As we all know, hope is Not a strategy.
Trend Followers are not tied to fundamentals, so they are prepared to take advantage of the emotion that drives a stock or the market up. And they always employ a Trailing Stop Loss that can take them out if and when the stock or the market turns, in order to maximize profits and minimize loss.
Always— Ride Your Winners; Cut Your Losses.
