Thursday, November 08, 2012

Learning the skills to be a trend follower

I had an interesting conversation today with one of the other traders in the mentoring programme, and the current state of the markets. Currently we are in the position whereby the US indices are on a short signal, yet this has not been confirmed by either the FTSE or the DAX, which are both showing higher relative strength, considering the still-fragile state of the Eurozone.

This means that at the moment we are in a situation where few good looking set ups are coming up on our scans, at that we are still lightly invested at the moment. While we would like a decent trend to play with (and soon!) periods such as these are all part of the learning process about being a trend follower. Periods where the markets are in a non-trending state teach you the value of waiting for decent set ups, good risk control, and learning the necessary mindset to deal with these non-trending phases.

We have been fortunate enough to generate profits over the last few months, despite not having a decent underlying trend in the indices. Who knows how long this situation will last. Whatever, this lack of a trend will resolve itself at some point, and there will be decent move to determine our bias. When that occurs, then the skills learned during this period will have shown that "good things come to those who wait" with the bulk of our equity intact.

Remember the famous Ed Seykota quote in his Market Wizards interview "Everybody gets what they want out of the market"? Well, when a decent trend does finally show itself, then the traders need to show they have courage not to sabotage themselves, and be scared of making profits - big profits. The best traders will sit in their positions and resist the temptation to bank their profits until such point in time when the trends have exhausted themselves, and appropriate exit signals are given. The less successful traders will take profits way too early, scared that they will evaporate and disappear.

So you can see, the varying market states (trending or non-trending, volatile or stable) all play a part in a trend follower's development. Each market phase requires the aspiring trend follower to learn new skills. Once these are learned, then a good trader will be equipped to deal with both uptrends, downtrends and non-trends, while remembering there will always be something new to learn in the future.

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