Friday, July 11, 2014

No stress here

Given the relative short-term nature of my own entry and exit parameters, as of yesterday I am now fully in cash, waiting for the markets to make their next move. Individual traders should remember that cash is a position, which is an important positional advantage when conditions are not favourable. You don't have to be in the markets all the time. This is a phase where patience and discipline are tested.

My stops allowed me to exit trades where either the trend never really started, or where the trend had finished, with emotional indifference. The stop methodology took me out of the losing trades with small losses - just as it should do. No second guessing, no stress, and certainly no hoping that price would reverse back and start to go in my favour.

Other traders who, by definition, trade longer-term trends, may currently be experiencing a bigger pullback in their positions prior to any trailing stops are hit. By the same token, their systems will allow them to ride longer-term trends, while coping with bigger retracements. All a matter of preference.

The giving back of open profits is where a lot of traders struggle with trend following. With hindsight, they can see where the extreme of a price move was, and they end up berating themselves for not exiting the trade at the top, even though that would have meant overriding their exit rules. The danger of doing that is, the next time you exit a trade in such a fashion, you may feel smart for a couple of days. However, it is quite possible that trade may develop into the biggest trend of the year, giving you a multiple R profit. But you cut your profits short. This is a good example of a recency bias affecting your trading.

Now we are out of the market, we can wait and observe objectively to see what the markets do next, and prepare ourselves for when the markets are more favourable towards us.

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