Thursday, August 15, 2013

A sense of perspective

Trend followers need to heed what the market is telling them. If the market conditions change from an uptrend to a downtrend, then their bias should shift from the long side to the short side. The clue is in the name - you wait for a trend to appear and then follow it.

It is in these periods where the trend changes that we experience the joys of giving back a portion of the open profits on our existing trades. We are waiting for our trailing stops to be hit, at which point we will be taken out of our positions.

It is always a dilemma for a trend follower - how much leeway or wiggle room do you give a trade? Too tight a stop and you could be stopped out on a bit of noise or volatility. Too loose and you will let too big a portion of your profits disappear.

It is these periods that also prove difficult psychologically for inexperienced traders to stick with trend following. However, you can read up on many of its most famous exponents, such as Ed Seykota and William Eckhardt, who say that any idea of overriding the system rules (such as when to exit a trade), thinking they knew better, cost them money in the long run.

Trend followers never expect to get in right at the start of a move, nor expect to get out right and the extreme point of the move. They also do not use price targets, which may limit their profits on a significant trend. If you cannot accept those points in your own mind, then you will be destined to struggle to use such a method successfully.

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