In trading most new traders allow hope and fear to dictate their trading. They have a losing trade and instead of selling it and getting out they instead hope it will come back to even allowing the loss to grow. Another error for new traders is that when they have a winning trade they fear that the profit will disappear so they sell for a small gain and miss the big trend in their favor. When hope and fear controls the trader they end up with big losses and small gains. A formula for ruin.
Instead the rich trader is fearful of losses getting bigger so they sell quickly when losing, risking a maximum of 1% of their capital on any one trade. Rich traders are able to think clearly and trade rationally knowing exactly what they are risking, when their stop is hit, they get out. This enables them to keep all their losses small.
When a trade is immediately a winner for a rich trader they hope it will run 100 points in their favor. Rich traders enable this to be possible with a trailing stop, they do not get out of a winning trade until a key price reversal has happened that tells them that the trend is actually reversing.
Rich traders are fearful of losses growing bigger and hope that their winners will continue on a monster trend. This mindset allows them to be on the right side of trends and avoid any huge losses. This is why the best traders in the world are trend followers and win consistently. Do you want to join their club? Then do not let fear and hope dictate your trading decisions use them correctly.
Archives of “Trend Following” tag
rssAll Type of Traders Are Trying To Catch Trend Only
Long term trend followers are trying to be right about the long term trends in the markets they trade using mechanical systems.
Buy and hold investors are trying to be right about the stock market indexes and mutual funds being in a long term trend over their lifetime.
Value investors believe that under priced stocks will reverse and trend higher over the long term based on the cheap price they are getting based on a companies fundamentals.
Day traders are trying to capture the trend that happens in one day’s time frame.
Swing traders bet that the trend reverses off support or resistance levels and give them a profit.
Can Slim traders are trading the trend of a hot growth stock out of a base price range or cup with handle pattern
Bear are betting that the trend reverses and something goes down in value and they make money.
Call buyers are trying to capture an up trend, call sellers want to profit from a down trend.
Put buyers are trying to capture a down trend, put buyers want to profit from an up trend.
Traders buying long option strangles are betting on a trend either way bigger than what is priced in, Strangle sellers are betting the trend will be less than what is priced in.
All trading methods are simply an effort at trend identification and capturing profits by entering at a high probability moment and exiting with profits in place.Being on the right side of the trend in your time frame is what a successful trading method is all about.
Trading Errors When Trend Following
Who really wants to define a loss? Only smart trend followers. Most people think they can postpone a loss. They become investors instead of traders. Many refuse to define a loss. I have seen traders not close a losing trade, after they realized that the trade’s potential is greatly diminished and has gone against them. They want to right. All the way to the poor house. This is a typical trading error when trend following. You need an exact plan when you are trend following. You can not make it up as you are going. This is what losers do. Besides having the exact plan you must believe in it and follow it. Do not think of the money. Think in terms of percentages. Follow your rules and stay in the marathon of trend following. Successful trend following is not about tips or magic indicators. It is about you and how you approach the markets. You must be willing to take losses once it is clear the trade is not working.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts, commodity options or forex can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
Trend Following Gives You the Needed Plan
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Jesse Livermore and natural disasters
Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.
In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.
Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:
“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”
Ten questions to ask yourself before every trade
Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
- What is my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the trigger to trade?
- How will I exit with a profit? A price target or trailing stop?
- At what price will I know that I was wrong? Where is my stop loss based on the position size?
- Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope?
- Is the risk small enough that I can emotionally handle the loss without blaming the market?
- Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
- Am I committed to staying disciplined and following my trading plan on the trade?
I believe the answers to these questions will determine your success in any trade more than anything else.
Strategy
- Adaptable- a strategy must be able to adapt to a changing market. It must also be able to adapt to your internal changes. If nothing changes there would be limited chances for profit. Every trader must root for changes but it does not matter if you cannot adapt.
- Definable- there are times when you need to override your strategy but that happens for less frequently than we think. A majority of your trades you should have a definite reason for a action.
- Quickly explainable– if you can’t explain your strategy or reason for a trade in a minute or less it is probably too complicated. Until you fully understand your strategy a majority of your “indicators” are just putting a band-aid over a gaping wound that is your lack of understanding.
- Personal- You are an input into the way you execute. You cannot be something you are not. Do not get me wrong there are things about yourself that you need to bend to trading but strategy should not be that one. It is hard to fake being tall and expensive to be a type of trader you are not.
I am not saying a trading plan will make you a successful trader, there are other factors. It is a necessary first step. You need a trading plan to consistently and confidently execute. Your trading rules should answer whatever questions the market asks you. Originally I made the mistake of planning out my trades, for example. If the market does x I am going to do y. Well when I was creating that plan that was what was working. When I started to apply that plan the market had changed. That is why many probably scrap their plans or do not work on them in the first place.
You are either a system trader or a discretionary trader. Each has it’s own equity curve and set of responsibilities. Below are some videos that you will find helpful.
10 Trading Truth
An entry does not determine profitability it only determines potential profit the exit is where the win or lost occurs, focus on that.
- A robust trading system means nothing unless you can follow it with discipline and self control.
- Charts don’t care about any one persons opinions why should you?
- Good trading will make you some money but only good risk management will allow you to keep the money.
- Good traders search for the right entries, great traders search for the right systems.
- Bad traders have an opinion, good traders have a plan. (more…)
39 Powerful Trading Tips by Ed Seykota That Will Rock Your Trading!
Quotes by Ed Seykota
Technical analysis
1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
2. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
3. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours. (more…)
Markets: They Trend, They Flow, They Surprise
Markets go up, down, and sideways. They trend. They flow. They surprise. Have markets changed? Not only have markets changed, they will continue to change. Check your history books. If you have a valid market philosophy, learning to accept that change and flow with it is your greatest asset. No matter how ridiculous market moves appear at the beginning, and no matter how extended or irrational they seem at the end, following trends is the rational choice in a chaotic, changing world.
That thinking leaves trend followers as generalists when it comes to their trading strategy and that’s not easy to accept for many. The dominant trend within universities is ever-narrower specialization. A higher premium is placed on deep knowledge within a single field (read: fundamental expertise in one market), versus broad wisdom across multiple fronts.3
For example, one trend following practitioner started trading trends in 1974—making hundreds of millions in profits and perhaps billions for clients. The major strategic elements of his trend following trading systems have never changed. He was blunt: “The markets are just the markets. I know that is unusual sounding.” (more…)