Sunday, December 07, 2014

My plan for 2015

Trend following is an absolute returns approach. As a result, I have no benchmark to work or compare my returns to, such as an index. While you attempt to limit the downside as far as possible, there should be no limits as to how much you can make as a trend follower.

With that in mind, I am already getting ready in adjusting my overall trading plan ready for 2015. Some of these points have already been discussed in recent posts, however, this post will attempt to summarise the changes.

1. Too much emphasis on the general market

While I have made a positive return this year, it is way below what was possible.This is partly because my level of trading activity in 2014 has been way lower than in previous years - you can't win the lottery if you don't buy a ticket!

The main reason for this was my pre-occupation with what the markets in general have (or haven't) been doing. This has clearly been a mistake on my part. I should have been reacting to what the price action in the stocks I was identifying on my scans, as I was intending to trade those instruments. As a result of all this, I identified way too many set ups that subsequently generated big profits, and yet I did not take the signals!

I've had the good fortune to speak to a couple of other trend followers over the last few days whose basic ideas match my own. Their advice has helped clarify in my own mind that this is one of the main areas I want to focus on in 2015.

The last time I get myself a big nudge in this regard was when I reviewed my performance in the summer of 2013. At that point, I made a commitment to react to more signals that matched my criteria, while keeping within my own risk parameters. It is probably no coincidence that, in the month after that, I got into a few trades that started trending, and I made huge open profits as discussed here.

2. Social Media

Going through my twitter feed there has been a lot of commentary that goes against my own beliefs about trading and the markets. Now, a lot of it may be considered conventional wisdom, but trend followers should be ploughing their own furrow. If most market technicians and fund managers are long a particular stock, and I get a short signal, then should I act on that signal? Absolutely. The downside is limited - that's what good risk control is for. But the upside is unlimited. When acting on an appropriate signal, you are giving yourself the opportunity to profit from a potential trend.

There are very, very few traders out there who solely concentrate on price similar to me.  I want to keep my trading as objective as possible, focusing only on price. This is a good thing - if we all traded the same way, on the same timeframe, then there wouldn't be a market of buyers and sellers that we can profit from.

For example, lets look at some examples of typical comments that appear on my twitter feed from time to time:
  • "VIX has moved up 10% in recent days" - Big deal. I am trading price in ABC plc or XYZ Inc, so they should be my focus. I'm not trading the VIX.
  • "The markets are overbought" - As we have seen, markets or individual stocks can stay overbought (or oversold) for weeks or even months as price continues to trend.
  • "There's negative divergence about" - So?
  • "The breakout is on lower than average volume" - A breakout and price move is very real, regardless of volume. If a price move I am trading is achieved only on half the average volume, does that mean I only get half of my profits???
All these statements above are probably factually correct. But do they or should they form part of my trading plan or thought process? In a word, no. As a trend follower, the focus should be on price. Price tells me when to get in a stock, in the same way it tells me when to get out. Risk management controls any downside. As Ed Seykota may say, these sort of statements could fall in the "file the news" drawer.

So, while I follow relatively few other traders on social media, it is possible that some of those have subconsciously have affected my thinking over the last year or so, contributing to my relative lack of trading activity. The problem is that many of those traders have ideas about risk management or psychology that I totally agree with. Notwithstanding that, I will be giving some thought about changing the composition of my social media feeds.

3. Diversification

My other area to focus on is to look at what other instruments outside of the stock markets are also doing, as this will give me some diversification. As we have seen in recent months, crude oil, some of the precious metals, as well as some of the major forex pairs have experienced big trending moves.

4. Risk

Nothing new here, but one thing I will reinforce for the purposes of this post. The overriding factor to all this is to control my level of risk. I will not be going in all guns blazing into several new positions on a day by day basis. For one thing, no trader has an infinite amount of capital. In theory, my only constraints going forward will be my overall level of risk relative to my equity (portfolio heat).

So there you have it. Nothing to do with changing entries or exits, but all to do with mindset, and reinforcing my own beliefs, and trading those beliefs. I have already put a big sign above my own screens to keep these various points in view.

2015 - I can't wait!!!

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