Wednesday, May 15, 2013

Patience with winners, impatience with losers

By definition, a trend follower will be impatient with his losing trades, and patient with his winning positions. By the very nature of the system, losing trades will be stopped out quickly, whereas, if a meaningful trend develops, you will keep your positions open until such time that an exit signal is given. Although it doesn't work in 100% of cases, generally speaking the longer you hold the position, the bigger the trend (and therefore profit).

I am extremely impatient with losing trades. I will suffer lots of very small losses as, if a trade does not act as I intended, I will close the position, even if it was opened the same day.

On the other side of the coin, you are required to have tremendous patience to keep hold of your winning positions, and to resist the temptation to close those trades, whether it be for fear of profits turning into losses, or by thinking that the trends have moved far enough, and you end up trying to 'time' your exit.

By cutting your losses and running profits in this fashion, you will also become accustomed to seeing decent profits on your trading platform every day, with only small losing positions against them, and even then, they will probably only last for 24 hours or so before the losing trades are closed. Seeing your open positions showing a cumulative profit every day is also great for your confidence in the method.

It should be clear either by looking at some of the indices such as the Dow or the Nikkei, or a whole bunch of stocks around the globe, anyone trying to time their exits from long positions at the moment may be be leaving untold profits on the table. Worse still, those trying to pick a top to go 'short' in these markets will be eroding their trading accounts, as they take the other side of a trend followers' trade.

The markets, whether it is the indices themselves or individual stocks, will give a clear signal when the time has come to exit these uptrends. In the meantime, simply hold on for the ride.

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