Monday, February 17, 2020

Tesla - letting the big trends run

The recent price rise in Tesla is just another example where people who got into the uptrend, and been able to let the trend takes its course, have been able to profit handsomely.

Here is that chart. Based on my own entry and exit rules, entering on 13 December at the $363 level would have generated open profits of more than +22R as of now, with the peak being at over +31R in February. If ever you want an example of letting your profits run, this is it:

This is a classic example of what happens during an explosive uptrend. There was no sign of what was to happen, with (again) the Volatility Factor reading showing a beautiful contraction to its lowest level since May 2018 prior to entry. And, as price has moved upwards, we can see the expansion in both the Volatility Factor and 2ATR readings, as well as numerous overnight price gaps. 

Psychologically, these moves can be very difficult to sit in. The urge can be to take profits off the table after a strong day or two, for fear of price reversing straight back where it came from and losing all that open profit.

In addition, if price really accelerates, you may have to sit through sharp pullbacks or retracements which do not necessarily signal the end of the uptrend, but can significantly erode both open profits and your ability to stay with it and follow your process. We can clearly see that in Tesla's price action so far this month.

I've talked before how my first mentoring student experienced his first big winning trends here in 2013, which put him on his way to being a profitable trend follower. The phrase he used at the time was "This is really testing my mettle!", which has always stayed with me. 

Fortunately, he was able to stick with it, and reaped the rewards - not only from that period, but also in subsequent trades he has taken with similar characteristics, such as with Bitcoin in 2017.

Given that, as trend followers, the majority of our trades end up generating small losses, we NEED the occasional big trend. Without having the ability to keep in trends until they are over, we risk destroying the positive expectancy of our approach.

These types of price moves do not happen every month. Or even every year. And they often come out of the blue. Which makes it all the more important to stay with the process. You have to let price run its course until an exit signal is given, which indicates that the trend, based on your chosen timeframe and parameters, has run its course.

This is summed up perfectly by Richard Dennis, taken from his Market Wizards interview:

"The correct approach is to say: This structure means up, and this structure means no more, but never that this structure means up this much and no more".

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