Monday, July 23, 2012

Big counter-trend days

Days like today are the reason for rigid risk control in your trading. There's no such thing as a 'sure fire' or 'can't lose' trade. There always have been, and always will be, days like today which can easily erode hard earned profits. Markets never move straight up or straight down - there are always bumps along the road.

It is also strong down days like today where it is easy from a psychological point of view to throw in the towel and bail out of any long positions. As hard as it is, you must stick to your exit signal rules and wait and see if your stops are hit. From a trend following perspective, if you are tempted to bail out of your positions then that suggests to me that either:
  • You do not have the psychological strength to follow the rules;
  • You are trading too large a position relative to your equity.
If you have been thought this, you may feel like an idiot in the days to come if you have exited your trades, at what happens to be the absolute extreme of the counter-trend move.

Days like this that are the proving ground for trend followers. If your risk levels are under control, then you know what are prepared to lose, and therefore you are comfortable in sticking to your rules and waiting and seeing what happens.

I do not have a crystal ball. I do not know what will happen in the markets, whether there will be governement intervention, or any other major developments - we have seen today that both Spain and Italy have imposed short-selling restrictions. All I know is that I follow the trend until I get the appropriate exit signals. So that's what I'll keep on doing.

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