Monday, June 25, 2012

Gulf Keystone Petroleum

This chart of UK stock Gulf Keystone Petroleum is a great example showing the full spectrum of trend following. To begin with, some failed breakouts (in both directions) until in early November a long signal that heralded the start of a pronounced uptrend, which would have generated nice profits. This stopped very suddenly before reversing and giving a short signal at the beginning of March, which is still working.

That early period would have tested both a traders' risk management and psychology, in that those 'false starts' would have caused losses and may have planted a seed of doubt as to whether the system works, whether trend following is for you, etc.

If you had been buying and holding from say September/October, you would been sitting in that position for several months now with a small gain to show for it. In the meantime, despite that initial whipsawing, trend followers would have come out well ahead as a result on both long AND short signals.

To a degree all this boils down to your personality. I myself would find it extremely difficult to be holding on for several weeks or months showing very little return or loss. On the other extreme, I do not have the personality to trade on an intra-day or short term basis. The trend following method I use is my 'happy medium' and the trading style that I am most comfortable with, and at the end of the day, it is THAT which will determine whether you have true belief in the system and the signals it generates.

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