While reading Market Wizards for the umpteenth time I came across the following quote from Brian Gelber, which sums up the emotional peaks and troughs associated with trading, and trend following in particular:
“This is my view of a year in the life of a trader: Four out of
twelve months you are hot. You are so excited that you can’t sleep at
night. You can’t wait to get to work the next day; you’re just rolling.
Two months out of the year, you are cold. You are so cold, you are
miserable. You can’t sleep at night. You can’t figure out where the next
trade is going to come from. The other six months out of the year, you
make and lose, make and lose.”
This second quote from Gelber (talking to Jack Schwager) is very relevant to my own recent performance:
"Pressing is one of the reasons I'm sitting in here with you for so long during trading hours. The markets haven't traded well in weeks, and we are proud of ourselves for not having thrown a lot of money away."
While the length of each of these phases may differ, in principle this is exactly how trend following works - depending on the market conditions and whether any trends take off, it is those 'hot' spells are where you make your money. The rest of the year is a grind. That is the nature of the beast. That is why risk management is so important - so that you minimise any losses when the markets aren't great, and you therefore have sufficient equity to capitalise from those 'hot' periods.
Some people find this difficult to accept. They want to achieve a certain level of performance each year, or even each month. That just ain't going to happen. You can only take what the market is prepared to give, and if its in a particularly volatile or non-trending phase, then you won't get a lot - if anything. Aspiring trend followers need to accept that, and heed the necessary warnings given to them. In those phases, you should go and get the golf clubs out and wait for the markets to start playing your tune.
Sometimes those cold periods can last all year - 2011 was a example of this for me, and the bulk of 2014 so far has been as well. 2008, 2009-10 and the first half of 2013 were examples of those hot periods. You never know when they will start or when they will end. You never predict - you just go with the flow.
What I do know is that markets oscillate between trending and non-trending phases. If you are in a non-trending phase, then yes it is frustrating. But, in my case, that also creates a sense of anticipation for when the next trending phase will start. And when it does, I will be prepared to act.