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Twenty Truths About Trend Following

  
Analysis, Education
  • If traded properly, you will have lots of small losses, a few small gains, and a few big winners.
  • You will have to accept that your opinion or beliefs about what might or might not happen count for nothing.
  • Often, a new trend will start seemingly for no obvious reason.
  • Trends have a tendency to persist, until they don’t.
  • You do not need to understand the fundamentals behind a stock, commodity or other instrument – however, you do need to have a method of determining whether price is trending or not.
  • You never need try to pick a top or a bottom in a market.
  • In strongly trending phases, markets can persistently stay overbought or oversold for several months.
  • Every so often, traders pronounce that trend following is dead. Usually, this occurs just before a major trending phase begins.
  • Being able to effectively follow price trends means you need to have the ability to follow a simple set of rules about when to enter, and when to exit.
  • Because you will suffer lots of small losing trades, you need to have rigorous risk control.
  • You need to accept that individual markets can move from from trending to non-trending phases (or vice versa) at any moment.
  • Every so often, price will move in a particular direction much further than anyone can believe.
  • There are only two theoretical price targets when trend following – infinity when going long, and zero when going short.
  • Once in a profitable trade, there is only one price level you need to concentrate on – your trailing stop. Everything else is noise.
  • Your stop methodology should be able to identify when a trend has finished.
  • Trading with the trend is conceptually very easy to understand, but psychologically very difficult to master.
  • Patience and discipline are key components of a successful trend followers’ armoury.
  • Trend following encapsulates the principle of cutting losses short, and letting winners run.
  • Trend following is boring – depending on your chosen timeframe or parameters, you could go through significant periods of time without any entry signals being given.
  • Some of the most profitable periods for trend followers are when they do absolutely nothing, other than let existing trades play themselves out.

The Intuitive Trader -Quotes from the Book

  
  Education
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Having read Kurzban’s Why everyone (else) is a hypocrite, I am convinced that the left brain/right brain split is a gross oversimplification of the brain’s functional organization. Nonetheless, sometimes simplifications work well enough. For today’s post I’m going to share some thoughts from Robert Koppel’s 1996 book The Intuitive Trader: Developing Your Inner Trading Wisdom. It’s an extended argument for and a series of illustrations of using the right hemisphere to expand trading prowess.

The bulk of the book is a series of interviews with traders and those who worked with traders, many of whom predate my active involvement in the markets. Among the cast of characters are Bill Williams, Richard McCall, Charles Faulkner, Edward Allan Toppel, Ellen Williams, Linda Leventhal, Howard Abell, Tom Belsanti, and Peter Mulmat.

Here are a few disconnected excerpts that I thought worth passing along.

“[T]he experience of successful trading is subjective, unself-conscious, and intuitive. This state of mind, it seems to me, has more in common with the spirit of jazz—improvisational, automatic, and responsive to the riff—than with a well-articulated and analyzed process of decision making.” (p. 6)

“Some traders are still of the opinion that we ‘make’ profits and ‘take’ losses. The simple answer is: we make both. Loss has to be assumed in trading as inevitable not accidental.” (p. 19)

On the importance of ritual: The author describes one of the most successful CME floor traders who “after completing his trading card, as he puts it in his pocket, … always says, ‘Yeah.’ … [H]e developed this ritual because he sensed the feeling of letting down after he would have a loser. And he had to figure out some way within himself to be able to go on to the next trade with the same level of energy, resolve, and motivation that he would get from one good trade to the next good trade.” (p. 63)

In response to the question “Have you ever figured out what percentage of your trades are profitable?” Peter Mulmat answered: “No, I haven’t. I just look in terms of monthly performance. That’s kind of the criteria I use to gauge my performance. I find to go any shorter period of time is just frustrating for me.” (p. 188)

Between Theory And Fear

  
Analysis, Education
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Hell tortures you to stop learning.

 George Soros is setting up institutions to study the failure of economic thinking. They have succeed in demonstrating failure, he said this afternoon at the CEU in Budapest, but not in discovering what to do about it. 
The source of the problem, he explained, is relying too much on theory, on knowledge, and not on how our not knowing what to do makes us act in ways that change the world, which world we don’t see because we expect it to conform to our theories. We need to be able to discard our theories when they are proven wrong, and we need to understand that no general theory is enough, because our actions are constantly changing the world we need to respond to and understand.
 
So I said to him after his talk:
 
– You have divided human activity in two parts, theory, and manipulation. Theory doesn’t work, and manipulation of markets is based on crowd behavior, that is, fear. But since ancient Greece, the parts to human activity have been divided into not two, but three: you have left out practical action.
 
Practical action differs from manipulation, fearfully following and leading each other, in that its end is making learning easier. It’s purpose is outside of itself, in the part of life where we learn, where we find beauty, what makes life good.
 
Why not establish institutions that study how economic relations are practical: what forms of cooperation lead to a life of learning and freedom from manipulation, and which don’t. And study how to make the transition from the present institutions based entirely on greed and fear to the kind we need to have. Do you understand?
 
– I have studied maximization of happiness.
 
– No that’s not what I mean. Counting results of fear based behaviors: doing that is living still in the world of the theoretical and the manipulative. We need to study how to cooperate, study what forms of cooperation help us learn to make our lives better.
 
Let’s go, says George Soros assistant, urging him as she has been doing for the last few minutes as we talked. OK, I say, I tried. You remember me, right?
 
– Yes, he nods his head.
 
I’d asked him for a job the day before when I saw him walking down the street from the University to his hotel.
 
Practical necessity. I need to get out of this hell of Budapest, this place putting pressure on me not to learn.
 
People say it is difficult to diagnose the political problems of our times, but I don’t see the difficulty. We’re together in this hell trapped between theory and fear.
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