Thursday, June 28, 2012


Some of the downside in the markets today was as a result of the revelations concerning Barclays and their conduct in the LIBOR market. The chart below shows that, even though a long signal was given a few days ago, the preceding price action still shows a series of lower highs and lower lows since the trend starting revesing at the end of March, so this is one long signal that should have been avoided. Even if you did go long on the signal, then adherence to your stops (as clearly defined on the chart) would have meant that you would have been stopped out at some point today with a small loss.

The secret to trend following is to ensure that your losses are kept small and that your profits outweigh your losses - the easiest way to do that is to adhere to the system rules, ensuring that you cut your losses and let your profits run. One thing that trend followers NEVER do is override their exit signals, thereby avoiding the possibility of a small loss turning into a big loss, seriously eroding your capital. And don't get me started by saying that a paper loss in not a real loss....

No one knows how the Barclays story will unfold over the coming days - will there be any subsequent revelations to come out? If you were long on this, the easiest thing to do would be to take your loss and move on, avoiding the possibility of tying your capital up for weeks or even months before the stock price recovers to the original entry point, or letting your loss become any larger.

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