Saturday, April 19, 2014

If it works - do it!

If you have found a trading methodology that generates positive returns, suits your personality and risk profile, then you have found your own trading holy grail.

Occasionally people will proclaim loudly that your method doesn't or can't work. You know the sort - "Trend following is dead" (yes, that one again), "Trend following doesn't work on stocks", and the like.

People who have read this blog for a while will know I have been very careful to say that trend following isn't the only way. There are thousands of ways to make money. The trick is to find a method that works for you. Trend following works - for me. It suits my personality. I know and understand its strengths and weaknesses. I know how to interpret the market conditions, and adjust exposure accordingly. Others have found that trend following works for them - plenty of others haven't.

Markets need buyers and sellers. People who have different ideas, different timeframes, different reasons behind their trading or investing decisions - be it technical or fundamental. That creates a market. Traders or investors need people to take the other sides of their trades.

If people say that my method doesn't work, that's fine. What they often mean is that they couldn't make it work - for them. This may be down to personality, risk management - there can be any number of other factors.

Keeping a trading log with the various metrics such as those shown here will help you keep track of performance. If something starts to go awry, then you can review your log and try and identify whether it has been a change in the market, or a change in the trader, that has caused a loss of performance.

When you get into the realm of big fund managers, your level of equity, and consequent position size may also play a determining factor. Some methods may work better with a smaller level of equity.

If you have read Market Wizards, some of those traders interviewed talk about the difficulties they encountered when the amount money under management grew. For example, having a very large position may restrict the stocks to wish to trade, to ensure that you don't end up materially moving the markets against yourself. What might work for an individual trader may not work for a hedge fund, and vice versa.

Opinions about different trading methodologies are as common as opinions or predictions on what might happen in the market or with an individual stock or commodity.

Van Tharp states that traders trade their beliefs about the market. If you don't believe that a particular way can work, then it is highly likely you won't be able to trade it successfully - even if it is proven to be a profitable method, and you know the parameters and rules.

Bottom line - if your way works, stick to it. Don't let others try and dissuade you.

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