Sunday, July 07, 2013

How I control my cash equity - and how you can too...

People have asked me how I am able to have such rigorous risk control, and minimal cash equity drawdowns while trend following. Historically, such a method is known not only for making big profits, but also for the potential of suffering significant drawdowns for prolonged periods of time. I firmly believe this is due to the stop placement I use. The following couple of quotes may give you a clue:

"Experience has proved to me that the real money made in speculating has been : "IN COMMITMENTS IN A STOCK OR COMMODITY SHOWING A PROFIT RIGHT FROM THE START" - Jesse Livermore, from How to Trade in Stocks

"Stocks should be at a profit the first day you buy them. In fact, having a profit on the first day is one of the best indicators that you are going to make money on the trade." - David Ryan, from his Market Wizards interview

If this means that I have to close a position on the same day as opening it, then so be it. I want to keep my losses as small as possible.

There is also a nice psychological aspect to this. My losing trades usually get cut after a day or two of being opened. My winning trades, on the hand, are left open as long as the profitable trend remains intact. That means on the majority of days, when I open up my trading platform I am greeted by a bunch of profitable positions, and hardly any losing ones.

If you would like to know more on my own approach to trend following, and how I am able to keep drawdowns to a minimum, then consider one of the following:
  • My e-book, which fully discloses my system rules;
  • 1-2-1 training, where I can go through the system in great detail at your own pace;
  • By signing up to the mentoring programme, where I can provide full support for 12 months and guide you through individual trades and stop placement.

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