The trading process

The whole 'life' of a trade, and how a trader executes it, can be broken down into the following series of steps:

• Observe the markets, keeping an eye out for potential opportunities;
• Identifying a potential opportunity that matches your entry criteria and risk profile;
• Open the chosen position (including simultaneously placing an appropriate initial stop level to exit the position without significantly damaging your equity);
• Managing the trade throughout its life (converting your initial stop into a trailing stop as the trade progresses);
• Exit the position;
• Review - Evaluate the trade to ensure that all the criteria of your strategy were adhered to.

Recommended blog - newtraderu.com

Successful US trader and author Steve Burns runs the newtraderu.com blog, which I highly recommend to all traders. Steve calls himself a 'trend trader' rather than a trend follower, but the basic principle of identifying and following a trend still applies.

Seeing what you want to see

When a position starts to go against you, it is very tempting to try and 'interpret' a chart in a manner that verifies keeping the trade open.  This is where traders try to use indicators as a 'crux' to justify keeping hold of their position - "I'm long, yet price is going down, but the RSI is saying it's oversold, so I'm okay" - that sort of thing.

Going against the market - a couple of profitable short trades

Here are another couple of good examples of short trades that have generated nice profits. Again, the initial entry signals were valid and would have cropped up on the scans that I use. From there it is simply a question of placing the trade and then watching it unfold, and letting the profits run.

A couple more long trades

I have not traded either of these UK stocks, but again both showed the common characteristics I look for when trying to identify potential new trends. Both of these gave valid signals on my system at the appropriate time, and have generated healthy profits several times bigger than the initial risk. Which as a trend follower, is all you want.

The journey to trading success

It is a well known saying that 90% of traders fail, quite often within a few months of starting. They are seduced (quite often by glossy marketing) into thinking that traders can generate significant amounts of money with little or no background knowledge, and dream of becoming millionaires, quitting their 'real' day jobs, and a life a plush houses and fast cars. The reality is very different.

Recommended blog - embracethetrend.com

One of the few blogs I make a point of reading is written by fellow trader Richard Chignell at embracethetrend.com. He focuses on the psychological aspects of trading, which as we all know is a critical component of achieving long-term success.

Noventa - a volatile trend?

One of my current long positions is in this UK stock, Noventa (chart below). On the chart you can see the breakout early last week, which was my cue for opening a position. The chart showed all the characteristics of a long set up that I like, therefore there was no hesitation in opening the trade.

This market's making a fool of me!

With a wonderful sense of timing, no sooner than I commented publicly on Friday that a couple of potentially key levels in the indices had been breached (being Dow 12,500 and DAX 7,000), then the markets decided to do an about turn and shot up. This continued yesterday with a strong start to the week. With my current bias in my portfolio to the short side, this resulted in an erosion of profits. To top things off, my remaining long positions decided to stay flat!

Overtrading Part 2

The other point to make about overtrading is that, if your are trading too large a position relative to your equity, then it is very difficult to have an 'emotional indifference' towards that position. That phrase was famously coined by Larry Hite in his Market Wizards interview.

Overtrading

Any method of trading suffers periods of drawdown, and a string of losses can have a devastating impact upon your equity. Making sure that you have your risk parameters set at sensible levels is a pre-requisite for long-term trading success. Even if you are using a system with a high positive expectancy, you always need to ensure that you factor in the unexpected when determining risk levels.

Gold and silver on the slide

While taking a quick look at the charts of gold and silver it is clear to see that the uptrend from a couple of months ago is over, and that price is now going in the opposite direction.

Both the uptrends signals given in August were almost text-book, in that there was a contraction of volatility and a higher low created before the breakout occurred. We can now also see that there was a contraction in volatility and a lower high given immediately prior to the short signal being given earlier this week.

Google - another example of following your exit signals

In my previous post I referred to the circuit breakers and trading halts put in place after Black Monday. By coincidence, we had a trading halt called in US giant Google's stock yesterday after it's latest earnings report was released into the public domain several hours too early, and which lead to a sharp plunge of near 10% in a matter of minutes.

Follow the signals - Ceres Power

Here is a very vivid example of why you should automatically follow your exit signals, if you are utilising a trading method involving specific entry and exit criteria.

One of the guys in the mentoring programme went long on UK stock Ceres Power back in mid-July, after getting the appropriate entry signal. He then held on until an exit signal was given a few sessions ago, and pocketed a profit 7 times what he risked - a very nice return for pressing a couple of buttons and following the system. Today, the stock plunged over 70%.

Entries and exits are NOT the priority

Although I am passionate about trend following as a method to generate profits in the markets, it would be totally wrong for me to say that it is the only way to consistently make money over the long term.

In the overall scheme of things, the three aspects of a effective trading method ranked in order of importance are:

• Risk management;
• Self management;
• Trade management.

If you have trading rules, then follow them!

No matter what your trading style or system parameters, failure to stick to these rules can cause significant damage to your equity. It is also just as dangerous to override a signal given, regardless of the reason.

...And some you lose

Following on from my previous post, the strong move up caused me to be stopped out of one of my short positions, which had been going nicely in my favour.

Some you win...

The only way you can implement a proper trading strategy in the markets is to be fully comfortable in both the method of selecting entries and exits, as well the notion that you can accept and embrace risking your capital.

Trading and the blame game

When you have a bad day in the markets, or your positions go against you, who or what do you blame?

• The markets?
• Other traders?
• Your broker?
• Your computer or software?
• Any other external factors?

Ophir Energy

This previously unknown UK stock to me came up on the scans this morning, and I mentioned this as a potential short candidate in the protected Twitter feed - as you can see the stock fell 10% today.