A huge multiple R winner

David came to me just over a year ago for some 1-2-1 training, after I was recommended to him by another trader.

It has been interesting to see how his trading has developed since then, and how he has dealt with suffering a high proportion of losing trades. With a trend following approach, that is to be expected, but as I explained here, it is critical to also let winning trades run, as you never know which set up will generate a huge winning trade.

Holding your nerve while giving profits back

Psychologically, the greatest hurdle for inexperienced trend followers is dealing with the period where there is an element of 'giving back' some of the open profits generated.

There are two such scenarios where this occurs:

• During a trending phase in the market, where there is a counter-trend movement, or
• At the end of an existing trend, where usually (but not always) there is an expansion in volatility and either the market degenerates into a non-trending state, or the trend reverses.

What does this chart show you?

I've shown below the current chart of the FTSE, which has seen a couple of 'up' days to start this week. Does the price action of the last couple of days change anything? To a trend follower, no. Based on this chart, the system parameters used show that the trend is down, and the price action contained within the trend is deemed to be 'noise'. Indeed, the parameters used in the system indicate there can be further upside of 200 points or so before the trend is called into question. However, the last couple of days is where the psychological side comes into play. You would need to remain faithful to the system, and not 'second guess' what it is telling you. How would you feel if you exited a short position on this right now, only for it to fall say 1,000 points over the next few weeks? Remember the words of Old Partridge in Reminiscences of a Stock Operator - don't lose your position.

Remember that trend followers never go 'all in' on a position. There is no such thing as a 'cannot lose' bet. Appropriate risk management will keep us in the game, even if we are proven wrong on this particular trade. All we can do is follow the signals, control our risk, and wait for an exit signal (whenever or wherever that may be).

Trend following is based upon identifying a trend, and following it. We never predict when a trend will end, as that may severely curtail our profits, should a significant trend take hold. So, in the current market state, traders who follow such a system would be short, and will remain so until an exit signal is given.

What would Old Partridge do?

The markets have continued their uptrend with the announcement of the agreement reached in Europe overnight.

The danger now is what to do next. Depending on their chosen timeframe, hardened trend followers will simply sit 'on their hands' and do nothing with their existing positions except update their stops in accordance with their rules. Other traders will be cashing in on their profits on the view that the markets are overbought, and don't wish to lose some of their profits - a classic example of cutting your profits short.