Sunday, August 04, 2013

Mark Douglas, William Eckhardt and trend following

While I was away last week I received an email from one of the traders I mentor. He has been reading Trading in the Zone by Mark Douglas, and highlighted a couple of sentences from the book that he felt related to me:



"The best traders not only take the risk, they have also learned to accept and embrace that risk"

"The best traders stay in the flow because they don't try to get anything from the market, they simply make themselves available so they can take advantage of what ever the market is offering at any given moment"

I would say that both highlight factors common to all good traders, but that the second comment in particular has particular resonance for all trend followers. When entering a new position, we have no idea whether that trade will generate a profit. All we are doing is acting upon the entry signal that our system has generated. Then we sit back and see what happens.

Coupled with this is good risk management, which we use to limit our losses because we never know which trades will work, and which ones will fail.

Once in a position, we restrict our losses as much as possible, but we do not restrict our profits. We do not fear losing money we have made. On our biggest winners, those who use indicators may well have only made a fraction of the profits that a trend follower would. Stocks or other instruments which develop meaningful trends can stay overbought or oversold for an awful long time...

We will never get in at the absolute bottom, or get out at the absolute top. We look for a new trend to set up and potentially start, and we then hop on board. Similarly, we only get off the trend when the exit signal is given that the trend has extinguished itself. To a lot of people, that is too simple to work. They would look to add additional filters and indicators. They would be wise to remember the words of William Eckhardt, one of the most prominent systems traders in the last 30 years or so:

"Pure price systems are close enough to the North Pole that any departure brings you further south".

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