Sunday, April 24, 2016

20 truths about trend following

  • 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.

1 comment:

  1. This is a great list, thanks for sharing Steve! It's all so simple... just a little trickier to execute consistently. Thanks again!