Saturday, August 10, 2013

A trader's development - a case study

Below is a summary of a live case study in the development of an aspiring trend follower, who is one of the traders in my mentoring programme. As you will see, it has been a case of slow but steady development, a few 'A-ha!' moments along the way, combined with a desire and commitment to succeed.

I first met Tom (not his real name) in early 2012 for some 1-2-1 training. He already had some knowledge of trend following, and felt it was a concept that would suit him and his personality. He knew and read about the Turtles, Market Wizards such as Ed Seykota and Larry Hite and the like, but had never come across anyone who used such a method, especially on stocks.

Unknowingly, the weekend we met was right at the end of the general market trend that had been in place for a couple of months. Tom eagerly put on some positions and very quickly found himself in a drawdown. This impressed upon him the need to correctly interpret the general market conditions, and to avoid overtrading. 

A couple of months after that, he became the first person to sign up for my mentoring programme. In fact, it was he who suggested such a thing, so that he could get ongoing assistance and support. So in effect, he became a test case - could I help him achieve the results we both wanted?

In his favour, he had already shown me a strong respect for risk, and a basic confidence in the system to stick with it.

Tom carried on trading, and then we came across another issue - he was placing too many trades that had already broken out in the same direction several times. In essence, he was joining the existing trend too late. On quite a few occasions, almost as soon as he opened the positions, the trend failed and he was left with losses.

The rest of the year was spent winning and losing, dealing with the general market and its lack of trends, but all the while developing the skills and mindset to succeed.

The additional rules in the addendum to the e-book were then released, and this help Tom limit his losses further. The basic theory behind these rules made complete sense to him, which is half the battle in implementing any change. You need to be 100% compatible with whatever methodology you decide to use.

2013 arrived, and with it, new issues. Tom was on an upward curve, and was making money, but he found he was too lightly invested during the early part of the year. As a result, he missed out on a lot of potential profitable trades. Partly this was down to his own work commitments (more on this in a moment).

I met Tom again, and we went through plenty more charts and talked about the system, where he felt he had issues etc. I assured him he was getting closer to a big breakthrough - it was a matter of time. I knew this because he was mentioning the same stocks as good setups, without referring to my own tweets on what to watch. From talking to him, you could also tell the he was developing the necessary mindset which would allow him to achieve long-term success.

Tom's biggest problem was his lack of access to the markets during the trading day. The scans used at that time only highlighted stocks that gave signals after they had hit the ideal entry points. This was a particular issue for him, as it meant that, even if he took a position in a stock, he may well have got in after the stock started moving. This reduced his potential reward:risk ratio. In some cases, when a stock moved quickly, he missed out on taking the trade altogether.

The breakthrough came with the advent of the new scans developed. These allowed potential signals to be identified before the entry signal was given. This meant Tom could place orders on the open if required, which he left in for the rest of that day. If they triggered, he was now in those trades as close as possible to the optimal entry price, that otherwise he may have missed.

He now had the best of both worlds. He was able to identify good set ups and trade them accordingly, but he was able to ignore the intra-day noise and concentrate on his full time job.

Last weekend, Tom phoned. Just over the course of the previous 4 or 5 weeks, he had seen his equity increase by almost 100% (it's gone up again this week). Some of these were in the same stocks as me, some on others he had identified on his own. He had been through another new experience - that of being in the position where several trades were all developing decent trends, building up a large amount of profits. He fought off the siren call of the 'safe' option of taking the profits, before they could be eroded. He had thought of Old Partridge in Reminiscences of a Stock Operator, and the knowledge that he would lose his position - what would he do if those trades carried on without him? He knew the right thing to do was to stay in the trades.

Over the last 18 months, Tom has now encountered the varying market conditions, seen the good times and not-so good times, developed the discipline in sticking to the rules, and is now reaping the rewards. He has the necessary skills which will allow him to trade profitably going forward. He is reaching the stage of unconscious competence in what he is doing. And has his profitability increases, the initial cost of learning those skills gets ever smaller.

If you would like to learn like Tom, and be able to correspond with him and other traders on the same development path, then go here for more.

NOTE: In early 2018, there was a follow up to this case study - see here for more.


  1. Brilliant blog post Steve. Sounds suspiciously like someone I know...

  2. Great post. Reminded me from info I have read from Tom Basso and Laurens Bensdorp that the trend Following strategy you use needs to work with your lifestyle. For lots of people trading part time being in front of the computer or on your phone during the day is not an option and finding a strategy you can use at ties of day that work for you is the key factor