Saturday, April 11, 2015

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.

As it happens, within 48 hours, all four of those trades had been closed, as price had fallen back into the pre-breakout price zone. The price level used as a trigger for entry, and which had been acting as resistance, had failed to act as support on a re-test. So, I got taken out.

Despite this, I have ended the week with open equity at new highs. Why is this? Again, the answer is very simple. Those positions that I am holding have continued to trend upwards, and all of of them made new highs during the week.

Just by following some basic rules, and when taking into account those open profits, then returns for the current year to date are now just over 50%.

Of course, there is no knowing what will happen to those open trades - they may continue to move in my favour, or price may start to reverse and erode some of those profits before the trailing stops are hit. I have no idea. All I am doing is controlling the downside, and not placing any limits on the potential upside.

In other words, this is basic trend following in action - controlling risk, cutting losses, and letting profits run.


  1. Hi Steve I think my post on your other post never went through.

    As your entry criteria is based on intraday, do you also exit based on intraday price action or do you wait for a close at the end of the day?

  2. Hi Paul. Yes if my stop level is breached, then I'm out. I have 'hard' stops in place at all times.

    I've seen examples in trades I have held where my stop is hit within the first 5 minutes of a trading session, and then price carries on moving down the rest of day. If I had waited until the end of the day before exiting, then the loss would have been much bigger - maybe even more than 1R. Of course, doing this means that occasionally you can get whipsawed out of a trade, but I am comfortable having to accept that. The overriding thought is that I never want to allow a small loss the opportunity to turn into a bigger loss.