The Top 10 most read blog posts

It is amazing to me that, since starting this blog back in 2008, it has now received one million page hits.

The blog has morphed from initially being more of a diary of my own thoughts and my trading, to talking more about the general concepts involved in trend following.

While trading is one of the most popular keywords on any internet search, trend following is more of a niche area. To many, it is a marmite approach to the markets - you either love it or hate it.

Using volatility contraction to increase your profits

Often you see people talking about a winning trade, and how far in percentage terms price moved in their favour after entry.

But on its own, this doesn't tell you anything - to me, it is a worthless metric when evaluating performance.

As a trader, I'm far more interested in the size of the profit (or loss) generated when expressed in terms of R.

Trend following, absolute returns and controlling open risk

At its core, trend following is an 'absolute returns' approach. You only have to look at the high-octane monthly performance generated by the Turtles back in the 1980's to see that. But to achieve that, you generally cannot impose too tight a control over the levels of volatility you have to endure. That is the other side of the coin.

Questioning some popularly-held beliefs

Stripping back our beliefs and subsequently our rules to their absolute basics, as trend followers, ideally we would want to be able to:

• generate an entry signal as early as possible into a new trend;
• exit a non-performing trade, if the new trend has failed, as soon as possible; and
• allow our position to run as far as possible on our chosen timeframe until that trend is invalidated.

Around those basic concepts people can follow pure price data or utilise technical analysis to 'formulate' their entry and exit rules.

As I've said before, I can be a bit of a trading heretic, and like to challenge some of the more popularly-held beliefs about how to trade successfully.

Below are a couple of those beliefs which I believe are worth further scrutiny - the use of multiple timeframe analysis and trend 'filters'.

A Turtle talks about trend following on stocks

Almost a month ago I posted this article about how that, given the recent price action, I was currently shorting individual stocks. I also mentioned that I had recently taken a couple of long trades, again purely based on meeting my entry criteria and triggering an entry.

Well, since then the long positions taken ended up generating small losses, but some of the short trades taken are still going strong. No reason to exit if the trend is still intact and the trailing stops haven't been hit...

Staying in my own circle of competence

Every so often someone contacts me to say they disagree with what I say and my beliefs, that some other successful trader they know of says the opposite to me, or simply to assure me that trend following doesn't work.

Well, I have news for you - and them.

I couldn't care less if your beliefs or methods are different to my own, which are rooted in those of people like Seykota, Dennis, Donchian, Parker, Hite, Livermore and others.

A couple of messy charts

If you are inclined to trade the indices, you may be familiar with the charts of the UK FTSE and the Australian ASX, which show a distinct lack of direction in recent months:

Some thoughts on differing trend following performance

Even if you adopt a trend following method, the nature of the price action in the markets traded will affect the performance that different trend following methods can achieve.

Thanks to Michael Covel's excellent book on the Turtles, we can review the performance achieved by those traders*. And we can see that, even though they were all looking at the same basket of instruments, the traders achieved wildly differing results.

Jerry Parker on volatility

It's been a while since I read Michael Covel's The Complete Turtle Trader - the story of the famous Turtles experiment with Richard Dennis and William Eckhardt and their band of trend followers in the mid-1980's.

Whenever you read an old favourite after a while you tend to discover some little nugget that you may have previously overlooked. As an example, today I came across the following excerpt featuring quotes from Jerry Parker:

Much ado about nothing

Well that's the first quarter wrapped up for 2016. And, as the metrics show, nothing much has happened in terms of performance. Looking at the monthly returns over the last year or so in particular, these losing months have been kept as small as possible. And, even after a period of non-performance, the returns on all closed trades is about 5R off of all time equity highs. Which, in the longer-term scheme of things, is nothing. One relatively decent trend will cover that.

As a comparison, below is a screenshot of the published monthly returns for Mark J Walsh & Co. While he was not one of the participants in the Turtles experiment from the 1980's, Walsh was an associate of Richard Dennis. You can view the monthly performance of other trend followers (including some of the former Turtles) here. 

What is your definition of trading success?

I came across an interesting discussion recently about success in trading. If you go and look around you can find dozens of different definitions as to what is success, not only in trading, but also life in general.

And, as with most discussions, everyone will have their own opinion or belief about how you define success, and it will almost certainly differ from the opinions or beliefs of others.

A word (or three) from Jerry Parker

I've recently been re-reading Michael Covel's book The Complete Turtle Trader, the story of the group of traders known as the Turtles, who along with their mentors Richard Dennis and William Eckhardt were some of my inspirations when I started on my own trading journey. No matter how many times you read books like this, Trend Following (also written by Covel), Market Wizards, Way of The Turtle and others, there is always something to learn (or maybe re-learn).

Chasing absolute returns

Major CTA's and hedge fund managers are hamstrung to a degree in their desire for chasing absolute returns, by the demands of those individuals that have invested with them. The majority of investors desire smooth returns and will not tolerate periods of drawdowns. As a result, those funds have to ratchet down the risk parameters used. The funds are also potentially restricted to a degree in terms of position sizing and the effect on the markets they trade when they wish to open or close positions.