Here is a very vivid example of why you should automatically follow your exit signals, if you are utilising a trading method involving specific entry and exit criteria.
One of the guys in the mentoring programme went long on UK stock Ceres Power back in mid-July, after getting the appropriate entry signal. He then held on until an exit signal was given a few sessions ago, and pocketed a profit 7 times what he risked - a very nice return for pressing a couple of buttons and following the system. Today, the stock plunged over 70%.
Some might say that it was luck that he got out before the big fall, however price action and a simple trend following system got him into the stock at the right time, and also got him out of the stock at the right time. He also had the sense to follow the signals presented to him, banked his profits, and moved on.
It would have been quite easy for an inexperienced trader or investor to fail to heed the warnings given when the price trend reversed, and to have developed an emotional attachment to the stock, as it would appear that you could have bought in right near the bottom back in July. However, trend following requires great discipline and common sense to follow the rules, come what may. This chart is a very stark reminder of this.
Hi Steve. I'm also a trend following trader even though I trade a slightly longer term system than yours. I'm writing you to ask you if it wouldn't be good to also filter the stocks by volume and trade the ones who trade an average of at least, lets say, 1000000 shares daily? I say this because these movements usualy happen in low volume stocks where buyers (or sellers) sometimes disapear with a blink of an eye. This way the risk of this happening could be somewhat lowered (even though it can not be avoided at 100%). If trading is controling risk, this way risk would be more controled.ReplyDelete
Congratulations for your site. I'm an regular reader.
João Silva (Portugal)
Many thanks for your comment - hope you enjoy the site. I know that a lot of people refer to volume when trading, however I've never really found that tracking volume makes a massive difference to my own trading. However, there are clues just from looking at the charts whether a stock has low volume (e.g. blocky daily price moves, lots of gaps in the chart from day to day, even days where there is just a dash recorded indicating no trades) - if any of these factors are shown on the chart then I automatically avoid it.The size of the bid/ask spread is also a clue.