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'.

Trading my own beliefs

I have a set of beliefs particular to myself, and my preferred style of trading. 

My beliefs about how to make money in the markets may be different to yours, or I may operate on a different timeframe to you, with different entry and exit parameters, and that is fine. That's what helps create a market of buyers and sellers.

For example, when I am trading, what is it I am buying and selling? My beliefs are that:

Traders, their beliefs and opinions, and what you can learn from Eckhart Tolle

"Accept, then act. Whatever the present moment contains, accept as if you had chosen it. Always work with it, not against it." - Eckhart Tolle

Every moment in the market is unique. Price can move in either direction in the next few seconds, the next few hours, the next few days, weeks or months. Despite what some people may say, you don't know what will happen. Price may be trending one direction on one particular timeframe, and could be trending in the opposite direction on a different timeframe. 

How you interpret what price is doing, and how reactive you are to any changes in price behaviour, will depend initially on those core beliefs you have about trading, and from there your own rules derived from those beliefs.

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.

One year on - have the changes worked?

"The great thing about being a trader is that you can always do a much better job. No matter how successful you are, you know how many times you screw up. Most people, in most careers, are busy trying to cover up their mistakes. As a trader, you are forced to confront your mistakes because the numbers don't lie." - Marty Schwartz

It is about a year since I start making some changes to my own trading approach. This followed a poor run of losing trades over several months which eroded most of the gains I had made in the first part of 2014. So, did those changes work?

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.

Paul Tudor Jones - Is there a contradiction here?

"My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out." - Paul Tudor Jones

The above excerpt comes from PTJ's interview with Tony Robbins, which appeared in the book Money: Master The Game. I've not read the book, but I've seen this paragraph quoted enough on social media.

2015 - any parallels to 1987?

As a trend follower, I'm not in the business of making predictions - I follow where price goes. Elaine Garzarelli I am not. Also, predictions can easily blow up in your face if you are proven wrong. On this post, however, I am simply observing and pointing out a few comparisons between what is happening now and what occurred twenty eight years ago.

So what happened in 1987? 

• The crash followed a recent move down from all-time highs made a couple of months earlier;
• There was an international situation which contributed to the price move - in this case, it was the spat between James Baker and the Germans;
• Price accelerated to the downside throughout the week, culminating in a big drop on the Friday on heavy volume.

When you are wrong, don't stay wrong!

In this recent post, I referred to Ocwen Financial Corp, a US stock that had been on my watchlist, and which broke out to new highs just ahead of earnings, triggering a possible entry.

Now, as I have mentioned numerous times, I do not initiate positions just ahead of such releases - the potential for price gapping against me is a risk I choose to pass on. My own belief is that is gambling, not speculating.

In this particular instance, price did gap down, which, had I taken the trade on the breakout, would have caused a loss greater than my initial risk.

But what if you did take the trade?

Marty Schwartz and the sunspot theory

Every so often you come across a post from a trader talking about a specific stock along the lines of "Is there a reason NOT to own XYZ plc?"

Whenever I see a question like that, it immediately sets off alarm bells, which more often than not are confirmed when you go and look at a price chart of the stock in question.

Ease off the loud pedal!

"I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play 'catch up' is lethal." - Ed Seykota
 
If you are a rules-based discretionary trader, you have the ability to decide when to take signals, or when to stay on the sidelines.

Why I don't rely on fundamentals

There are undoubtedly a lot of traders, as well as the investing community, who place great faith in researching, analysing and interpreting the underlying fundamentals of a company. This information is then used to assist them make buying and selling decisions. However, some traders (like myself) place no reliance whatsoever on what the fundamentals are telling me.

Frankly, I don't care how many widgets they are making, whether the directors are buying or selling, or what the price to earnings ratio is. I'm far more interested in what price is doing, because ultimately the company's stock price and its movements is what generates a profit or a loss for a trader.

What are your beliefs?

Part of your success as a trader will depends on what you believe to be important. As Van Tharp says "You trade your beliefs about the markets".

If you look at this list below, then I do not follow or use many commonly held beliefs out there:

• I don't study the fundamentals on a company - half the time I don't even know what these companies do;
• These days I don't even let the price action in the indices influence my trading decisions or market exposure;
• I don't track volume;
• Apparently trend following on stocks doesn't work;
• I take entry signals regardless of the time of day - whether it is in the first minute after the markets open or the last minute before they close;
• I take intra-day exit signals.

Beyond these beliefs, you can also look at the basic approaches or trading/investing concepts taken by successful traders. Go and read the Market Wizards series as an example and see the differing methods used by some of the most successful traders ever.