The reason that determining “the causal factors that brought about the trend in the first” is important is that without the identifying the underlying engines of trend causation, there is no way to differentiate between current market swings that turn into trends and current market swings that fail and turn into consolidations or reversals.

Consider all the millions of investment vehicles that trade every day. Each one of them is in the process of developing its own price discovery, creating a trail of price movement that we can chart and observe in hindsight.

Some of these price charts would show instruments in narrow sideways consolidations. Some would show instruments in more volatile, trendless chop. Some would show instruments in robust directional moves, either up or down.

What does any of these visible price histories alone tell about the probabilities of any one of these individual instruments developing an exploitable trend of the type that you posit investors should seek out? In my opinion, nothing.

Without identifying a set of underlying trend-generating phenomena, past price action alone tells you nothing about whether a current price swing will become a trend or not. The trends are only visible after they are well developed or completed, and jumping on a already-developed trend structure provides no additional margin of safety against suffering an immediate price reversal.

Looking at the charts of past trends, however, does create a powerful implication to the human mind that this type of past trending behavior in the markets can be identified and exploited in real time. My contention is that current price swings that will later become the trends that we observe in hindsight cannot be differentiated in real time from the market swings that do not ultimately develop into trends.

If investors wanted to attempt to capture trending behavior without trying to determine whether a trend was in progress or not, simply leave a partial position of an already successful trade in the market to run wherever the market takes it.

Eventually, some of these positions would participate in significant market trends. But you could only see the trend structure in hindsight, and you would still not know when the trends had ended, even if you rode the entire thing profitably.

Just my 2 cents, thanks.

It is the power of this backward-looking recognition in the human mind that compels us to then look forward to then try to discover trends in progress, and thus exploit this seemingly obvious and easy path to financial gain. This appearance of obviousness is an illusion.

Before you can follow a trend, you must be able to determine that a trend exists and that it is actually in progress at the present moment. Is it possible to make this determination with any certainty?

Sadly, there is no way to absolutely assure oneself that a directional move in the market will continue for any period of time. One cannot even develop a reliable relative measure of the success of a real-time trend determination methodology without the necessary data. How many of these datasets exist?

There may be trend-seeking investors who feel that they possess a methodology that permits to detect when a current market swing is in fact part of a trend and when it is not, but the “proof” of their ability to actually do this would require a valid sized sampling of their trades, cataloged over a sufficient amount of time to permit development of statistical measures of the magnitude and the significance of their outperformance. And this still wouldn’t prove anything about the future outcomes of using this method for real-time trend identification.

Even with an ourperforming method, how could the outside observer attribute the source of the outperformance to the trend-following investment philosophy?

Let’s say you look back and see that a trend has occurred in the past. How can you determine the causal factors that brought about the trend in the first place? If you could determine the factors that precipitated the trend, how can you be assured that the same factors occurring in the future in a different market would generate the same buying and selling responses that created the prior trend?

Most portfolio-based trend exploiting methods try to overcome these murky questions with diversification.

My take is that seeking trends in the market and talking about trend following is a form of a faith-based activity.

If you have an unshakable belief that trends exist (because you have seen that they occurred in the past), and you believe that you can detect when a specific market swing is in fact part of a trend and when it is not, then that belief by itself and the confidence that it engenders in the investor is the major benefit that results.

If you have a style or plan that works well for you I would think you may just want to keep it to yourself.

Unless of course you are a true humanitarian and you feel compelled to “give” your great gift to all mankind.

But then if it is a gift you wouldn’t have to defend it.