Friday, November 02, 2012

Having confidence in your method

Trend followers have a very simplistic view of the markets. We simply look at the trend of the price and follow it - if it's going up, we have a long bias, if its going down we have a short bias, and if it's going nowhere, then we can stay on the sidelines. All other sources of information can be ignored - price is all that matters.

Go and take a look around a sample of blogs and you'll get wildly differing opinions about whether the market is going down, is going up but with a pullback phase, etc, etc. Most of these sites will also talk about target prices (usually accompanied with a lot of squiggly lines on a chart showing a future projection of what the price level is going to do).

True trend following is an absolute return methodology - we identify a trend, follow it, and only close that position when that trend has exhausted itself and given an exit signal. With that in mind, the opinions of others can be discounted. This is not easy to do, given the number of financial and trading sites about, the opinions of the talking heads on Bloomberg and CNBC, not to mention the financial press. Trend followers can ignore all this (or observe simply for entertainment value). The only metric that matters is price.

People who switch to a trend following methodology can therefore unclutter their minds of the opinions and projections of all other external sources. Having confidence in the method will be tested unless you are able to train yourself to rely solely on what the movement of the price is telling yourself, and whether you can observe that in the correct way. Similarly, trend followers never predict tops or bottoms in a market. They let the market itself and price action contained therein tell them when it is time to exit a long or short trade. Trend followers can focus on the price action because at the end of the day, they understand it is ONLY the movement of the price action that will determine whether you make a profit or a loss on a trade.

I have complete faith and confidence in what my system signals are telling me, and that may well be at odds with what the majority of other traders may think. That's fine by me. Trading this method over a sustained period of time has given me the belief to act upon the signals given, no questions asked. And at the end of the day, that is what any type of robust, profitable trading method needs to be able to give you.

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