Sunday, February 15, 2015

The ups and downs in a typical week for a trend follower

This week was your normal week as a trend follower - a couple of positions got closed, including one which gapped against me after earnings were released (but I was still able to bank a small profit), a couple suffered an erosion of profits before bouncing back, while others carried on trending impervious to any external news or volatility in the general market.

The end result was of it all was that, while I now have fewer positions open, my open profits (in terms of R) are identical to that at the end of last week.

One guy in our group got into a stock where suddenly it became the subject of takeover speculation, creating multiple R profits in only a few minutes. He didn't know that when he put the position on a few days beforehand - all he was doing was identifying a possible new price trend starting, and decided to hop on for the ride.

One other member finally stopped riding a short trade in his local market which had been open for three months, and yielded a +10R profit. This covered a few of those small losing trades, while leaving some profit over.

All of the above is typically what someone who follows price trends has to go through - plenty of small losses, the occasional bumper profit, and lots of ongoing price noise, with the resulting fluctuation in their P&L and equity curve.

The thing is - when you open a new position, you never know which trades will fail, and which ones will succeed.

A lot of people can't deal with all that - they seek comfort in being right as often as possible, and bank small profits for fear of losing them. Trend followers go in the opposite direction - they look to aggressively control the downside as far as possible, but place little or restrictions on any potential upside. When combined with good risk control, that gives them their edge, and a positive expectancy.

All trend followers do is react to price action - we do not predict what could happen. Price and its action subsequent to our entries will tell us if we are right or wrong. If we are showing a loss, we cut our losses quickly, if we are in profit we will hold our positions until we get an exit signal.

Simple, but not easy.


  1. In an established long-term trend (say at least 1 year or more) such events barely register a blip.

    In my experience the difficulty with trading short term trends is that they tend to get real whipy.


    1. Thanks for the comment AM.

      You are quite correct that, if using a longer term system, then instances such as these can be classed as 'noise' and therefore you may well be able to filter them out of your overall decision making.

      However, I do know of traders who use longer-term parameters than myself, who are still very wary of initiating positions just before earnings, for example, because of the potential risk.

      I would also refer you to this post, which attempts to identify some of the pros and cons of shorter-term vs longer term trend following:

  2. Great post Steve. Inciteful as always. Keep up the consistent work!

  3. From my perspective being very wary of taking positions because of earnings just means I'm not long term enough.

    I've been reading your posts for a while now, keep up the good work.