Saturday, December 20, 2014

One good trend pays for them all

While still getting stopped out of a couple of trades this week which were at one time in profit, a couple of long positions have started to try and gain traction, combining for a current open profit in excess of 4R. While those gains can easily be lost in a day, it is nice to see some profits on my screen!

As Ed Seykota was fond of saying, "One good trend pays for them all!". Should a decent trend start to materialise, then it is quite possible that the run of losses suffered could easily be eliminated. Such is trend following.

During that poor run, all I could control was ensuring that my losses were kept as small as possible. I couldn't risk allowing some of those losing trades more wiggle room, in the hope that they would go back in my favour. No, all that would have done is open up the possibility of a small loss becoming much larger.

By the same token, if you get into a winning trade after a run of losses, the temptation can be to take a small profit, for fear of that trade reversing and ending up with another loss. As a trend following approach typically has a win percentage of less than 50%, it is imperative that the profitable trades are left to run as far as possible. You need the occasional big winner to ensure you have an overall positive expectancy.

Taking a small profit may cut short what could develop into a monster trend, one that could make your year. Imagine how would you be feeling if you had gone short on crude oil a few months back at say $90 and exited the trade at $85, for no reason other than fear???

Any trade is a good trade providing you adhere to your entry and exit rules, combined with good risk management. If you win, then that is deserved success. Should you lose, then it is a bad break - a cost of doing business.

Conversely, you can make money on a bad trade - one where you overrode your rules, or maybe took on more risk than you should. That can be classed as dumb luck. If you lose on those trades, then that is no more than you deserved.

All I can say about those losing trades is that, if I was presented those setups once again, then I would happily take them.

Good traders who have clearly defined rules will stick to their process, and not focus on the outcome too much. They know that, while they will definitely experience winning and losing periods, they will come out ahead in the long run. This is particularly true of trend followers.


  1. Steve, with your longest position trades: Do you ever take a partial profit at a new relative high (low if it's short) in the new trend, and buy back in at retracements?

  2. No, I may take a partial profit if the open risk becomes excessive - I may then use what I call the uniform risk exit approach. I NEVER buy at retracements. I only ever buy at new highs, or short at new lows.