Trends or Reversals: What’s best to trade?

Updated: Jun 22

How to decide which is the best Stock Trading Strategy for you.

Most positional traders and swing traders either specialize in trading trends or reversals. The most consistent and successful ones trade trends, although some legendary traders like George Soros and investors like Warren Buffet have also made a lot of their fortune looking for reversals.

My personal preference is 'trends' for singular stocks and 'reversals' for indexes and ETF's.

When Warren Buffet started investing as a business, he was a staunch Benjamin Graham follower. Warren would actively scout for opportunities that were mispriced, load on to them, and wait for them to reverse and deliver a handsome profit. It worked quite well for him given he became a multi-millionaire following that strategy.

Even now, he says he could deliver over a 50% per year compounded return, investing using the same strategy, if he had less capital to invest.

On the other hand, some investors and traders only invest in or trade trends and have built a fortune out of the same. Traders like Jim Rogers, Paul Tudor Jones, William O’ Niel, and Mark Minervini have had many years of consistent and successful track record of generating handsome returns with trend trading.

The Basics

So, what is the difference between these two forms of trading, and which one should you choose?

Trend trading is when you bet on the continuation of a move.

Traders mostly look for trends that are expected to last for varying lengths of time ranging from a week to a few years. The idea here is to look for continuation moves when the price is in a medium or long-term trend.

While trading trends, traders would have different systems to initiate the trades. These systems are designed to give entry signals either in pullbacks from the primary trend or towards a breakout when the continuation of the trend looks more probable.

My preference is a lateral consolidation on a weekly chart, this lateral movement provides rationale for a low risk stop loss. As such I developed a bespoke scanner just for my approach.

As a reversal trader, you would be on the lookout for oversold or overbought opportunities. Reversals are quite rewarding if you can maintain a decent win ratio and a favourable reward-risk.

However, reversal trading requires much more skillful execution than trend trading because markets trend most of the time, and reversal opportunities are far and few. But, one can build a fortune trading reversals only by getting a fe