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.

On defining a trend, interpreting volatility and when to go fishing

Jesse Livermore aboard the Anita Venetian

"Your definition of trend is the smoothing method you use. The methods you use to define trend are entirely up to you, so you get to define trend any way you wish; everyone may have a different idea of "the" trend." - Ed Seykota.

Don't think you know better than your rules

"If you take emotion - would be, could be, should be - out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings." - John W Henry

In trading, hindsight can be a not-so wonderful thing. Your stop gets hit, kicking you out of a trade for a small profit. All of a sudden, price takes off in the direction you were looking to profit from, leaving you on the sidelines.

Take it from me. If it's happened once, it will happen a thousand times.

Is this type of event frustrating? Sure.

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.

Stick or twist?

"We have a saying here: "It is incredible how rich you can get by not being perfect." We are not looking for the optimum method; we are looking for the hardiest method. Anyone can sit down and devise a perfect system for the past." - Larry Hite

A trader is always evolving, in terms of his ideas, beliefs and his method. As an example, you often read about how young 'fearless' traders learn to appreciate the importance of risk control - often after blowing up an account or two, or at the minimum having an emotionally demoralising experience associated with a major drawdown. Even some of the Market Wizards went through this.

Occasionally, a trader moves away from their original ideas and beliefs about how to make money. Again, some of the most successful traders have done this.

Letting the downtrends run

Having more losing trades than winning trades is to be expected as part of a trend following process. 

Part of the joy of trend following is that you never know when you will end up in a profitable trade, and once we do, we have no idea how long the trend will last for, and also how far price will move in our favour.

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...

Trend following, simplicity and robustness

"We have a saying here: "It is incredible how rich you can get by not being perfect." We are not looking for the optimum method; we are looking for the hardiest method. Anyone can sit down and devise a perfect system for the past." - Larry Hite

As a trend follower, it is important to acknowledge and accept that individual stocks making up the 'stock market' are in a constant state of change themselves, be it trending or non-trending, and all with differing levels of volatility, as well as the indices themselves, along with foreign exchange, interest rates, commodities etc.

Simplicity and robustness - with a word from Larry Hite

By their very nature trend following systems or methods are relatively simple pieces of coding. Read about some of the most successful trend followers in history, and they have even themselves referred to the fact that their rules could be written on the back of an envelope or the proverbial cigarette packet.

All you are trying to do is identify whether price is trending up, trending down or is stuck in a range. Once you have determined your timeframe, it is pretty simple to see that, and from there you can create your own parameters and rules.

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.

Controlling your losses, good trades and bad trades

Good traders continually worry about trying to minimise any potential downside. By the same token, they try to avoid placing any restrictions on the potential upside.

Take the four possible scenarios on any individual trade: 

• Big win; 
• Small win; 
• Small loss; and 
• Big loss. 

Good traders try to avoid the big losses at all costs. If you have a robust trading approach that has a positive expectancy, then the small losses can easily be recovered from.

Focus on what you can control

One thing that has always confused me is where people say you can always learn something from a losing trade.

The fact is that, once you are in a position, it is the buying and selling decisions of other market participants which will determine how price moves, and whether you make a profit or a loss. Nothing else. And how many of those other traders can you control or influence???

I talked about this in more detail referring to trading's equivalent of the 'butterfly effect'.

Sometimes you can do everything right in a trade, and lose. That's because no-one has the ability to predict what will happen in the future.

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:

Larry Hite and the EU referendum

"When I was a kid and got my first motorcycle, I had an older friend who would always get into fights. He told me, "Larry, when you are on a motorcycle, never argue with a car."" - Larry Hite, from his Market Wizards interview

This week I have been reminded of the above analogy when thinking about the EU referendum here in the UK. This is a classic example of a major 'event' which may (or may not) cause significant volatility and movement in the markets.

What I learned from two Market Wizards about volatility

Given that the markets have taken off to the downside so far in 2016, readers may be wondering why I have not taken any positions so far this year.

Which car mirrors your trading approach?

A few weeks back I came across this quote from David Druz which is thought provoking (Hat tip to @JLTrader1 for posting up this gem):

Most traders seek comfort in high win rates and/or as smooth an equity curve as possible. Yet long-standing trend followers have been able to successfully deal with the up and downs and the general vagaries of the financial markets. How that this been possible?

Simple, by making their strategies as robust as they can. Because they are not tailored towards a particular market state, they are able to control their losses when dealing with the volatility and lack of trending phases thrown at them.

Learning from past mistakes - and the markets

For those who have not traded through such a period in the markets before, you have been all geared up for an important educational experience over the three months or so. We have seen a big jump in volatility, combined with a sharp move to the downside followed by a 'V' shaped reversal in the general markets. Ideally, when experiencing these changes in the market state you want to keep your tuition fees as low as possible.

Words of wisdom from Stanley Kroll

A fellow trader kindly pointed me in the direction of the works of Stanley Kroll, who was a trader from the early 1960's. He passed away in 1999. He was a trend follower who preached simplicity, and was greatly influenced by two books I have quoted from in the past - namely Edwin Lefevre's Reminiscences of a Stock Operator (the biography of Jesse Livermore) and The Art of War by Sun Tzu.

Below are some words of wisdom from Kroll's book Dragon and Bulls: Profitable Investment Strategies for Trading Stocks and Commodities:

A trader's development - a case study

Below is a summary of a live case study in the development of an aspiring trend follower, who is one of the traders in my mentoring programme. As you will see, it has been a case of slow but steady development, a few 'A-ha!' moments along the way, combined with a desire and commitment to succeed.

Be objective and simplify

To paraphrase Monty Python, it may be stating 'the bleeding obvious' but trend following is a very simple concept. If a stock or instrument is going up, you go long. If they are going down, you go short. The only differences between trend followers as that they will have their own parameters which determine how early or late they get in and out of a price movement.