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20 truths about trend following

  
Analysis, Education

People are often attracted towards adopting a trend following because of its robustness and longevity, together with the returns it can generate.

This is no ‘get rich quick’ scheme – the basic concept has been proven to work over many decades, in up and down markets, and some of the most successful traders and Market Wizards have used it.
That said, it demands a lot from you. If you are considering adopting a trend following approach, here are some basic truths that you need to understand and accept:

  • 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 with very few entry signals being given; and
  • Some of the most profitable periods for trend followers are when they do absolutely nothing, other than let existing trades play themselves out.

Don't

  
  Education
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dontsign“Don’t think that trading is fun. The trading game should be boring the vast majority of the time, just like the real-life job you have right now.”

Don’t try to get even. This isn’t a game of catch-up. Every action you make has to stand on its own merits. Take your losses with detachment and make your next trade with absolute discipline.

Don’t ignore the warning signs. Big losses rarely come without warning. Don’t wait for a lifeboat before you abandon a sinking ship.

Don’t ignore your intuition. Listen to that calm little voice that tells you what to do and what to avoid. That’s the voice of the winner trying to get into your thick head.

Don’t project your personal life onto your trading. Trading gives you the perfect opportunity to find out just how messed up your life really is. Get your own house in order before you play the financial markets.

Weaknesses and Strengths of Trader

  
Analysis, Education

•Ambitious
Makes and follows long term business plan
•Unambitious
Will ignore long term business plan
•Calm
Will handle times of market volatility and make smart decisions
•Worrying
Will panic when markets are volatile and make stupid decisions
•Cautious
Strictly follows Stop-Loss rules and Protects Trading Capital
•Rash
Will not be diligent with Stop losses and will risk trading capital
•Cheerful
Handles losses and down times in markets
•Gloomy
Gets depressed when facing losses and makes poor decisions
•Well-Organized
Daily updating charts, indicators, business plans, Economic calendars (more…)

One Liners for Traders

  
Analysis, Education
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  • “The paradox is realizing that being in control is about letting go.”
  • “Even if you give your investments to others to manage, you are wholly responsible for that decision.”
  • Letting go of your ego doesn’t create self-esteem. In order to trade soundly, you must lose your ego AND replace it with sound, prepared, professional judgment.
  • The conscious mind assembles the data. The unconscious mind notices the patterns, makes the connections and guide your judgment.
  • “The depth of your emotional resources is as important as your finances.”
  • “The market is a collection of beliefs.”
  • There is no content, only context.
  • “If we ever fought battles, the main opponent was ourselves.”
  • “If you persistently adopt someone else’s view, expect their performance. In that case, why don’t you just put the money into one of the thousands of funds and crystallize your implicit delegation of responsibility.”
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