Tuesday, August 21, 2012

Be fearless, not reckless

When you participate in the markets, you may find yourself trading in the opposite direction to the majority of traders a lot of the time. This is especially true if you are a trend follower. I myself have been the subject of derision from time to time, from people who fail to acknowledge there is more than one way in which to make money in the markets. In a lot of these cases, people like to be proven right in their predictions about what will happen, about price targets etc.

I avoid making predictions about either the indices or individual stocks - I simply follow the trend of the price, which is the one metric that can be used to trade any type of instrument. I do not have price targets either*. Quite often, I also have little or no knowledge of what the companies I trade in actually do! As I solely follow price, I do not need to know any of this information.

Having traded the same way for a number of years, and having seen countless examples of where simply following the price works FOR ME, I have total confidence in the method I use. Where others fear to tread, I simply follow an entry signal providing it meets my criteria, regardless of what the majority of traders and investors think.

Therefore, it pays to be fearless in following your system signals. However, you should always temper that by using appropriate risk control, in case you are proven wrong. There's no such thing as a "can't lose" trade. In addition, there is always the potential for an unwanted price shock that could go against me. Therefore, I don't want to be foolhardy or reckless in my approach to risk. I always ensure I stick to both my individual position risk levels, as well as my overall portfolio risk limits.

* Actually that is not 100% true. A good trend follower will always tell you that his target on a long position is infinity, and on a short position it is zero!

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