Saturday, May 19, 2012

Trend following vs trading psychology

Those who believe in 'buy and hold', holding on for the long-term, trying to pick tops and bottoms, or who buy on pullbacks or go short on rallies should look at the chart below and think back to periods when they lost money. Now compare the various psychological states shown to the mentality of a trend follower who, when given the signals would act accordingly by either going long, short (or stand aside) in a totally unemotional manner, making money on both sides of the market, and protecting gains made with appropriate use of stops. All in accordance with a simple to understand, easy to implement strategy.

I've seen and read of people who have held on to losses for several YEARS in a particular stock, as they do not like to take losses, and would rather be proven right, whereas a trend follower would observe their stops, get out of a losing position (limited to say 1% or 2% of their equity) and move on to the next entry signal, in whichever direction that may be.

To those who hold onto losing positions - what's your 'uncle point'? 5%? 10% 50% or even worse, what if the company goes 'pop' and lose it all? (Think Enron). Surely it's better to limit your losses, admit you were wrong and move on???

What's more important to a trader or investor - to be proven right on an opinion, or to make money?


An effective trend following strategy can make you money in uptrends AND downtrends, and can be tailored to your preferred timeframe. Providing you have the relevant psychological make-up to accept that you will never get out at the absolute top, or enter at the absolute bottom (and who can predict that?), and you can accept that you won't make money in a non-trending market, then it is relatively simple to implement such a strategy. And then you can relax in downtrend periods such as 1987, 2000 and 2008, when trend followers pocketed huge profits by following their signals, controlling risk, and letting profits run. Or alternatively, in the case of those who simply invest in stocks in the traditional manner, such a system would let you know when to step away from the market and enjoy your profits.

Remember that even tech stock darling Apple fell the best part of $200 in 2008. And given the current market price action, and the economic news out there at the moment, who's to say that 2012 won't be as bad (or worse) than 2008? If you are interested in making money in such a climate, now is a great time to give trend serious consideration.

Obtaining my e-book, or gaining some 1-2-1 training or even enrolling in my mentoring programme would be a great starting point - I am here to help you make profits, and restrict any losses. Don't just take my word for it - please see these genuine testimonials, with the training available at a cost equivalent to the loss from one or two small trades, so what you got to lose?  If you are interested, please contact me at trader.steve@btinternet.com for further details.

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