Wednesday, July 28, 2021

The joy of helping an aspiring trend follower

A while back I received an urgent message from one of the traders in my mentoring group. He managed to get himself into a trade where a trend had developed in his favour and was now (in his words) "going parabolic". 

This person had been developing his method over a period of time, so that it best meshed with his full-time job, which in a pre-COVID world demanded long hours and lots of transatlantic travel. As a result, his chosen timeframe and parameters are somewhat longer-term than my own, but the underlying principles remain exactly the same.

After working on a very detailed trading plan, he has spent time refining his scans to best identify the opportunities he is looking for. And in trading terms, he has been developing his skills and method in cutting losses, and improving his risk control.

He already suffered one "A-ha!" moment when a stock he was holding a position in suffered a price gap against him following earnings. 

Now he was suffering the mental anguish of holding on while a big trend moved in his favour. 

Most aspiring trend followers I have come across are reasonably good at cutting their losses and controlling their risk. It is my belief that having the ability to hold on as a trend develops is the key element you need to develop.

As we know, we cannot predict what can happen
in any market. His message to me may have signalled the extreme of the price move. Alternatively, the trend may only just be getting going, and have a way to run. Who knew?

This is a path I have seen before with other aspiring trend followers. The difficulties come when confronted with what we trade and live for - the big winning trend.

Helping people break through these mental 'barriers' is the most enjoyable part of helping other traders.

In 2013, my first mentee went through this. I was on holiday at the time, but we spoke every day as he internally fought to hold on to a few positions which sharply went in his favour. Intellectually he knew what he had to do, but until he went through the experience he didn't fully appreciate the emotions involved. It was he who said "This is really testing my mettle". I have used that phrase on a number of occasions since then as it perfectly describes the internal battle people go through.

After those trades were eventually closed for a huge profit, he told me "NOW I get it". It was his biggest "A-ha!" moment. It was going through this which allowed him to profit from other subsequent big trends and make a major jump in equity. The full story is here.

Today, he is an excellent trend follower.

The danger for many who try to follow trends is that price can reverse, meaning they may lose a significant chunk (if not all) of the open profits from a particular trade. The market is trying to trick them into 'being smart' and attempt to pre-empt what they think could happen.

That leads to cutting winners short. In the long run, following your process and adhering to your rules (such as letting your trailing stop decide when it is time to exit a trade) will keep you in those big winners as long as possible and maximise your profit potential. And developing the ability to do that is essential in order to achieve the results you desire.

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