Trend Following -Important points for Traders

  • Trend following historically has a relatively low win percentage, across all asset classes. The positive expectancy from using such a system comes from the size of the winners far exceeding any losses incurred;
  • Trend followers never try to predict tops or bottoms in markets – they buy on strength and sell on weakness;
  • Strict risk managment and position size minimises the losses as far as possible when a losing streak hits;
  • Probably 80% of your trades each year will cancel each other out – consisting of small winners, small losers (restricted to 1R of your capital) and break-even trades;
  • The remaining 20% of your trades will probably account for 100% of your profits, but you never know which ones will generate the profits when you open the position;
  • To achieve this you HAVE to let the profits run until you receive an exit signal;
  • Stops are updated as often as your system rules determine;
  • And you have to adhere to your stops at all times;
  • Nobody knows when a trend will reverse, however when it does, you automatically give back a portion of your profits before your (trailing) stops are hit;
  • If a trend breakout reverses or fails just after entering a position, you will incur losses;
  • Significant increases in volatility can cause losses due to whipsawing or trading ‘noise’;
  • The best market conditions for trend followers are trending, stable markets;
  • The worst market conditions for trend followers are non-trending, volatile markets;
  • There are numerous trend following methods out there, but although the entry/exit parameters may vary, trend followers as a rule will make (or lose) money in the same markets at the same times;
  • If you don’t understand any of the above points, or are not prepared to accept these facts, then you do not have the mindset to follow a trend following method.
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