A decent trend gives its reward

Today saw the end of one of our most profitable trades in recent months. The chart is shown below. Again, all the basic criteria that we look for were present in the set up prior to entry, and once we were in the trade it was simply a question of focusing on our trailing stop and dragging it along.

As with all such trades, when opening the position you never know:

a) whether the trade will generate a profit or a loss, and;
b) how far will price will move should it go in our favour.

Make your goals process related

A lot of traders talk about having written goals they work towards, and in the main this is good advice. One thing I would avoid however is making these goals financially based, or to give them a specific time limit.

One thing traders have to accept is that you cannot force the market into anything. If you are utilising a trading approach that has a positive expectancy, then you can only take what the markets are prepared to give. There will be periods where your approach works better than others. You have to accept that.

Trend following differences

I was asked the question last night about how I differ from other trend following traders.

The basic principles I (and many other trend followers) follow have been used by many successful traders going back decades - people like Ed Seykota, Jesse Livermore, Richard Dennis and the Turtle traders, as well as Richard Donchian, plus others. All have influenced my own approach to trend following.

Each had their own method of identifying when to get in and out of positions, their approach to risk, their chosen markets, their trade selection process etc.

What each trader does over time is evolve and refine their own approach, while keeping the same core concepts and beliefs as other trend followers. The differences come in how they implement those beliefs, along with the specifics of the parameters used.

Follow your rules!

Today has been an interesting day in the markets, with a quick drop in the indices. The supposed reasons or catalyst for the drop is irrelevant – all that matters is the price action on what you are looking to trade, or what has happened to those positions you already held.

On days like this, the chances increase that anybody who is risking too much on each trade, or cumulatively, will get frightened out of their positions – more often than not, at the extreme low of the day. If your stomach starts churning too much, then that is a clear indicator that your risk control is not up to scratch.

The problems start when someone does this, and gets out before price went against them even further. They will no doubt think they are smart. What they have done is override their rules. This creates a dangerous precedent.

What are your beliefs?

Part of your success as a trader will depends on what you believe to be important. As Van Tharp says "You trade your beliefs about the markets".

If you look at this list below, then I do not follow or use many commonly held beliefs out there:

• I don't study the fundamentals on a company - half the time I don't even know what these companies do;
• These days I don't even let the price action in the indices influence my trading decisions or market exposure;
• I don't track volume;
• Apparently trend following on stocks doesn't work;
• I take entry signals regardless of the time of day - whether it is in the first minute after the markets open or the last minute before they close;
• I take intra-day exit signals.

Beyond these beliefs, you can also look at the basic approaches or trading/investing concepts taken by successful traders. Go and read the Market Wizards series as an example and see the differing methods used by some of the most successful traders ever.

New testimonial

I recently had the pleasure of meeting Fisayo, who was kind enough to forward the following:

"I am not based in the UK but was in the country recently for a vacation. I am a trader/portfolio manager based in Africa but still love to network with traders all over the world - as they say - you never grow old if you keep learning!

Trend following in action

This week was an interesting week.

Following a lack of new trades presenting themselves over the previous couple of weeks, on Tuesday and Wednesday I seemingly went crazy as I initiated four new positions over the two sessions.

What the reason for this sudden burst of buying? Simple - a number of stocks that I had on my watchlist finally attempted to break out to new highs, so I bought. In actual fact, more stocks than that broke out, but I have limits on the number of stocks I can open positions on each day - this is as I want to control any variances in portfolio heat. I do not want to massively increase my level of risk in a very short period of time.

Trend following - an overview

Trend following is a reactionary approach to trading the markets. We will wait for price to tip its hand (by moving to new highs or lows) before we enter a trade.

By doing this, we never get in a new position (or out of an existing one) at the exact top or bottom of a price move. We never look to buy low to sell high - we look to buy high and sell even higher (or short low and sell out even lower).

Studies have shown that, while markets do spend a great deal of time not trending, once a trend does start to develop, they have a tendency to persist. What nobody knows, however, is how long these trending phases will last, and to what magnitude.

Why I take signals on an intra-day basis

I had an interesting conversation this week with a trader about the merits of taking entry signals on an intra-day basis compared to an end of day basis when trading breakouts. Below I will try and explain the reasons why I take intra-day signals.

By taking end of day signals, traders are looking for a close above the prior resistance or level before initiating a position on the next day's open. They are looking to avoid getting caught in breakouts that fail on the same day, and that's all well and good. However, depending on how you calculate your position size, this could adversely affect your performance. Let me explain.

Easter bank holiday offers - 1-2-1 training and access to mentoring programme

For this bank holiday weekend only, I am running a discount offer for both 1-2-1 training and for the mentoring programme.

With the 1-2-1 training, you get individual tuition lasting several hours covering the basics of trend following, risk management and trading psychology.

By joining the mentoring programme, in addition to the 1-2-1 training you can also have full ongoing email and Skype support, access to my own trades and watchlists, join in our regular webinars and access our private twitter feed.

The cost for either option has been reduced by £100, making either option even better value. This offer will close on Monday.

Testimonials are shown here.

For full details on either option, and to order, please click on the links above.

2015 so far - a clarified mindset

Yesterday saw the end of the first quarter for 2015, and while again it has been a relatively light period in terms of the volume of trades taken, the performance has been very good, with significant open profits continuing to be held. These will only be taken into account on the equity and R curves when those trades are finally closed. Even today, which has seen some more volatility in the indices, those trades have continued to move in my favour.

In that respect, the period of poor performance suffered last year was a valuable learning experience, and the tuition fee was relatively small, particularly in terms of what I have learned about myself and my trading approach.

Objectivity and being prepared

A trader I know asked me to comment on a potential set up for a stock he was looking to trade. I gave my views and his response was that he needed "more objectivity and less interpretation."

He was basically saying that he was looking almost too deep into the chart, when trend following and trying to identify changes in trends is a pretty basic concept. It was almost as if he was looking for ways not to take the trade, when everything that we look for was there.