Wednesday, May 23, 2012

Dont interfere with the system logic

As mentioned in one of yesterdays' posts, the US markets turned sour in the last couple of hours of trading last night, and that has continued on in Europe this morning. Trend followers would currently remain holding their existing short positions (or possibly adding to them, depending on their system parameters). As I have mentioned before, some of the most profitable days occur when you do absolutely nothing in terms of closing winning positions, for fear of losing those open profits. The only thing trend followers should be doing in adjusting their stops in accordance with their system rules. Anything else and you would be overruling your system rules, and what is the point of that? If you feel tempted, then after adjusting your stops switch your trading platform off and forget about it for the rest of the day!

Those of you who have read the story of the Turtles will recall that, early on in their training, a big trend occurred which generated huge profits, yet only one of the Turtle students was able to stay faithful to the system rules and ride the trend all the way. The others thought they would be 'clever' and took profits when they though the move had finished. It was an early and stark example of how to act (and how NOT to act)when in a profitable trend.

Once a trend takes hold (as there currently is in the indices, oil, gold etc as well as many individual stocks) it is imperative that the end of the trend is never predicted. It is essential to the overall profitability of the system that the trend is allowed to play out. You will find that oversold readings given by oscillators such as RSI, stochastics etc., will have little meaning, and the chances are that following such as indicator will get you out of a profitable position way too early. If you doubt this, go and look at a chart of the Nasdaq for example, in the uptrend that occurred between late December and the end of February, or that of Apple, and see what the readings on such an indicator showed. You would have been kicking yourself if you had exited based such an indicator reading, very early on in the trend.

It is times like these where big profits cover the controlled losses generated on your losing positions. Big winning trends generate the overall positive expectancy and profits when using such a system.

Psychologically, this is a tricky scenario for those relatively new to trend following. If you are in profits, with correctly adjusted stops, and you are still fretting over your positions, then I'd suggest you are trading too big a position size.

All of the above is covered in detail as part of the 1-2-1 training available, which lasts for several hours and covers all aspects of how to successfully use trend following in the markets. For further details, please  contact me.

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