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'.

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:

Having the freedom to switch direction - riding the bucking bronco

One of the skills an aspiring trend follower has to develop is being able to accept when he is wrong, and to switch directions if necessary. He attempts to ensure that his beliefs or opinions about what may (or may not) happen to a stock, index or instrument do not impact on his ability to follow the entry or exit signals presented to him.

My 'A-ha!' moment

When I first started getting interested in the financial markets back in 2003, I plunged straight in at the deep end by day trading US stocks. I joined a chat room and immersed myself in their methodology, and even had some initial success, but then reality kicked in. 

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).

Trend following, Jesse Livermore and natural disasters

This is not the easiest topic to write about, but with the happenings in the US this week I feel compelled to write about trading and natural disasters.

Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

A message from (and a link to) Canada

I received a nice email during the week from Danny, a trader in Canada who stated the following "I stumbled upon your blog today and what a pleasant surprise it is turning out to be. Like you mentioned in your September 15th post (click here for that), it is indeed quite difficult to find people who trade stocks using a trend following methodology." So it is not just me - stock following trend followers appears to be an underground movement in trading circles.

The up and downs of a trend follower

Trend following has been proven over many decades, and by many of its practitioners, as an excellent methodology to make money in the markets. In terms of absolute returns, it may well be the best way to make money.

Trend following commandments

Michael's Covel book Trend Following was a big influence on my early journey to trading the way I do today. He has just released this short video, which I consider to be essential viewing for reminding you of the basic principles involved in using such a methodology.