Thursday, August 20, 2015

Does your timeframe fit your personality?

I was talking to an aspiring fellow trend follower recently about the difficulty he finds in staying in his winning trades.

I have found this is a common problem among people new to trend following. It seems that human nature is almost forcing or daring you to snatch profits while they are there, for fear of seeing them evaporate.

However, if you do that, you are cutting your winning trades short. This in turn destroys the positive expectancy that a decent trend following approach should be able to generate.

In a way, he has made things worse for himself, as he is trading a longer-term system. By using this, the winning trades could potentially last for months, if not a year or more. So the entry and exit parameters he is using require him to be even more patient, in order to let those winning trades play themselves out.

By the same token, he will have to watch for longer the process of a trend finishing and price starting to reverse, before triggering his trailing stop loss. 

If you choose to trade a longer-term method like this, you will also have to be able to sit through these periods of watching price going nowhere within the context of a longer-term trend. Second guessing, getting panicked out of a trade, or trying to predict what may or may not happen will lead to a big discrepancy between the results your approach could generate, and what you actually achieve.

Therefore, the longer-term the approach you use, the more patience and discipline you will need.

I guess because of my past trading experience (starting out as a day trader) and my own personality, my patience threshold is a lot lower than that - hence, my preferred timeframe and parameters are towards the shorter-term end of the scale.

A by product of this is that, if I am wrong on a trade (which is more often than not), my capital is not tied up for any significant length of time - in most cases, I get out of a losing trade within 24 hours of initiating it. With a longer-term approach, your capital may be tied up in a non-performing position for a greater length of time.

There is no one right answer to this that will be the right answer for everyone. But the right answer for you may be dependent on other factors, such as how much time can you devote to watching the markets every week, and whether your personality will allow you to sit through those major trends to the end.

Finally, there are two other points to make here, relating to risk and reward, as well as trading opportunity. A longer term method may be able to capture bigger trends (in percentage terms) but will the profits achieved be any better in terms of R?

Secondly, trading opportunity refers to the number of potential signals you may get in any given period. Go to this post for more.

Considering these questions may help you determine your chosen timeframe and intended holding period.

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