Simplicity and robustness - learning from Linda Raschke, Ken Tropin and Curtis Faith

"The minute you think you have found the key to trading, I promise you the markets will change the lock." - Linda Bradford Raschke

It is very easy to think that there is a magic set of parameters which will work best in a chosen market.

The problem is that a certain set of parameters, on a particular timeframe, may work well for a specific period of time, in specific market conditions. But as soon as you dare think "Eureka - this is it!", the markets will change character and those parameters will not work as well.

The expectancy gap and performance leaks

When trading, you are free to construct your own methodology and set of rules to use - what markets to trade, triggers for entries and exits, how much equity to risk etc. That's the easy part.
 
For the majority of us, the difficult bit is ensuring you keep operating within that framework.

Building your own approach to the markets and the decisions and actions you take are entirely within your own control. But you have no control over what the markets do. Ideally, you want to react to the market's price movements, and trade within the confines of your carefully constructed framework.

Losses and Whipsaws - one good trend pays for them all!

Any aspiring trend follower should expect runs of consecutive losing trades to be the norm, interspersed with the occasional small winner and, every once in a while, a big winner.

At some point, most people tend to look for some silver bullet to eliminate at least a chunk of those losing trades, and get the win rate up to 50% or even better.

But the harsh reality is that, throughout history, the most successful trend followers have prospered with a typical win rate of between 30% to 40% - irrespective of timeframe, or the markets traded. That, combined with a method allowing the cutting of losses and the ability to let profits run is from where the positive expectancy of the approach comes.

Recency bias, and labelling markets as easy or hard

I've seen it said that one of the goals you should have as a trader is to try and make money when things are easy, and that you should be more defensive and protect what you have when things are hard.

That is all very laudable, but from a trend follower's perspective there is a problem with that.

Learning from the Turtles experiment - what should you learn first?

The ad that started a legend.

An often overlooked aspect of the Turtle Traders experiment was not simply what they got told, but the order in what they got told. We can piece this together from the various writings about the experiment, including that of the Turtles themselves.

"Rich and Bill first taught us the foundations of basic gaming and probability theory. They explained to us the mathematical basis for money management, risk of ruin, and expectation" - Curtis Faith, from Way of The Turtle

It is also known that, while a commodities trader, Richard Dennis preferred not to read economic or crop reports - his preferred reading was Psychology Today. So I think it would be fair to say that (whether it was directly done or not) there was some basic trading psychology covered during the training period.

Known unknowns and unknown unknowns

As traders, we have to accept that we do not know what is going to happen in the future. While our chosen method would look to to profit from an 'edge', based on some form of probability or odds (e.g. trends tend to persist until they don't), we should never approach the markets with an attitude that we can be sure what will happen from one minute to the next, one day to the next, or one week to the next.

Price action in an individual stock, forex pair or commodity can change behaviour at any time.

Therefore, we must account for that possibility in our own method, our mindset and our attitude towards risk.

A famous lesson for the Turtles from a winning trade

I saw a recent tweet talking about how losing trades can be more instructional than winning trades. I happen to think that, for a trend follower, you can learn more from winning trades. 

A famous example of this is the heating oil trade taken by the Turtle traders, which occurred during their initial training period early in 1984.

Now, out of the group, the story goes that only one trader was able to get on a 'fully loaded' position and then fully follow the rules given to them by Richard Dennis and William Eckhardt - and that was Curtis Faith. And therein lies an important psychological lesson for people who are attempting to trade using a trend following approach.

Choosing not to play - how one trader approached the EU referendum

"Systems trading is ultimately discretionary. The manager still has to decide how much to risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important - often more important than trade timing." - Ed Seykota

Two weeks have past since the result of the EU referendum here in the UK was announced.

Playing great defence

As a trader, I am always more concerned with how much I could lose on a trade than win. Good risk control certainly helps you with that, but there are some other ideas that can help you keep losses as small as possible. 

Here are some examples of playing 'good defence', as Paul Tudor Jones would call it, which have helped me as a trader.

A plan on how to get over a major drawdown or price shock

It is an unfortunate part of trading that people can suffer the traumatic experience of losing a significant part of their equity in one go. In extreme examples, some traders may even blow up their account. This may be as a result of some major unexpected news coming out. It may be as a result of your broker putting most of your money in a downtrending stock. It may be because you took a big position just before earnings were released which then gapped against you.

When something like this happens, your mindset will take a battering, and before you commit any fresh funds to the markets, you need to step away for a while and regroup. As hard as it may seem, how you deal emotionally with what has happened is of paramount importance, and may even determine whether you can make money in the future.

Curtis Faith speaks

"Turtles do not care about being right. They care about making money. Turtles do not pretend to be able to predict the future. They never look at markets and say: "Gold is going up". They look at the future as unknowable in specifics but forseeable in character. In other words, it is impossible to know whether a trend will stop now or in two months. You do know that there will be trends and that the character of price movement will not change because human emotion and cognition will not change.

25 years on - Black Monday and trend following

19 October sees the 25th anniversary of 'Black Monday'. A lot of money was made (and lost) around that time - a look through the Market Wizards interviews shows how some of the best traders out there coped with an event, the likes of which had not been seen since 1929. These days there are 'circuit breakers' where trading is halted to prevent such a fall.

My own mentors

When I first started trading, it took me at least a couple of years before I found a trading strategy that I was truly comfortable with - namely, trend following. 

Initially I started out day trading high-beta US stocks, lured in (like many were) of the thought of making large amounts of money quickly. However I soon found that this did not suit me - I was often too slow to react to the entry/exit method I was using, and the commissions were swallowing up what profits I made. 

I therefore took the decision to fully research differing methods and timeframes.