Sticking with the process

My historical win rate is about 30%, so with the majority of my trades generating losses, I have learnt to accept losing money along the way.

To me, what is far more important than the monetary outcome of any one trade is whether I am sticking to my process and my execution:

More on knowns, unknowns and risk

The recent passing of Donald Rumsfeld caused me to reflect again on his (in)famous "known knowns, known unknowns and unknown unknowns" speech (see here), but the truth is that we always have such instances possible in the markets, at any time.

Tesla - letting the big trends run

The recent price rise in Tesla is just another example where people who got into the uptrend, and been able to let the trend takes its course, have been able to profit handsomely.

Here is that chart. Based on my own entry and exit rules, entering on 13 December at the $363 level would have generated open profits of more than +22R as of now, with the peak being at over +31R in February. If ever you want an example of letting your profits run, this is it:

How do you define a trend?

The past has happened. The future doesn't exist.

Therefore, we can only react and respond to what is happening in the moment of now.

So, for traders the question is, what is price doing now?

The tricky bit is how you define "what is price doing now".

Experiencing the first big winning trend

When a trader starts adopting a trend following approach, there can be a steep learning curve in terms in truly understanding the ups and downs they will experience - both in terms of open equity and the emotions involved. 

Aspiring trend followers will more often than not go straight into a drawdown on cash equity. This is due to them adopting the basic principles of cutting losses short and letting profits run, combined with the low win rate that is typically achieved. 

My observation is that people quickly develop the need for good risk control and the cutting of losses, but by far the most challenging aspect of a trend following approach is the ability to remain faithful to your exit rules once you get into a profitable trade.

Trend following, absolute returns and controlling open risk

At its core, trend following is an 'absolute returns' approach. You only have to look at the high-octane monthly performance generated by the Turtles back in the 1980's to see that. But to achieve that, you generally cannot impose too tight a control over the levels of volatility you have to endure. That is the other side of the coin.

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.

Trend following - a simple way to playing the long game

Warren Buffet once said “There seems to be some perverse human characteristic that likes to make easy things difficult.”

A good trend following approach allows you to participate in the equity and other financial markets eliminating a lot of the difficulties.

Your basic rules will tell you:

• what to do;
• when to do it; and
• how much to risk.

You can trade 'parrot-fashion'. No opinions or predictions are required. You simply follow price, see how it interacts with your chosen entry and exit parameters, and only then do you need to do something.

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.

Bitcoin and the evaporation of open profits

One of the most difficult aspects of trend following for inexperienced traders to accept is that you never get out at the extreme of a price move, and that there is always an element of 'giving back' a portion of open profits before an exit signal is given.

Generally speaking, the longer-term the trends you are trying to capture, the more wiggle-room your trailing stops need to give to current price action - this is to ensure that you are not stopped out due to a relatively minor retracement or price noise.

When starting to trade a new method or parameters, even if you have may be got the confidence of decent back testing results, there is still the big step into the unknown when it comes to dealing with the psychological element of letting profits evaporate when you have real money in the game.

This was brought home to me recently when discussing a long-term trend following system with an aspiring trend follower.

Richard Dennis, bubbles and crashes

To me as a die-hard believer in trend following, I never see market bubbles and crashes. To me they are simply uptrends and downtrends which, if you and your method can embrace the volatility, generate the types of moves where we can generate massive profits.

Learning from the Turtles experiment - what should you learn first?

The ad that started a legend.

An often overlooked aspect of the Turtle Traders experiment was not simply what they got told, but the order in what they got told. We can piece this together from the various writings about the experiment, including that of the Turtles themselves.

"Rich and Bill first taught us the foundations of basic gaming and probability theory. They explained to us the mathematical basis for money management, risk of ruin, and expectation" - Curtis Faith, from Way of The Turtle

It is also known that, while a commodities trader, Richard Dennis preferred not to read economic or crop reports - his preferred reading was Psychology Today. So I think it would be fair to say that (whether it was directly done or not) there was some basic trading psychology covered during the training period.

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.

Some of my beliefs about backtesting

When it comes to trading, I like to think differently. I'm not afraid of being a bit of a heretic when it comes to thinking about the markets. While I adopt and use 'classical' trend following and breakout principles, I also like to think for myself, outside the box.

As an example, lots of traders swear by running backtests and tuning their trading models based on the results of their testing and analysis. Certainly, in some cases with getting to grips with a basic concept, backtesting can be of some use.

The Golden Rule

I would be considered by many to be a loser at trading. This is on the basis that I have far more losing trades than winners. And, if that metric alone determined whether someone is profitable or not, then they would be right.

But fortunately, they are not. Because I use what Van Tharp calls 'The Golden Rule'. It has been around for more than 200 years. Trend followers swear by it. If you can use it, you can make money. What is it?

Richard Dennis, trend following and leaving your ego at the door

The siren call of the high win rate strokes the ego of many traders, and this causes internal conflict amongst people who aspire to be trend followers.

Left unchecked, the ego within us would make the desire to be seen to be right its primary focus, rather than to make money. But this goes against the grain when it comes to trend following, where the typical win rate can be between 30% - 40%.

An example in trade management - the trailing stop

When trading using a clearly defined set of rules, it can easily become frustrating for an inexperienced trader to get stopped out of a position, only for price to then reverse and start moving back in the direction of your trade.

Some see that as a weakness of their method. Yet I, and many other traders who religiously follow their rules (be they automated or not), see that as a strength. 

Trend following, unrealistic expectations and a look into a fund's performance

Some people have unrealistic expectations when it comes to trend following - and trading in general, for that matter. 

I remember a trader contacted me once about some mentoring and essentially was looking for some assurance that, if he adopted a trend following approach, he would be able to make a +100% return over the next year.

A famous lesson for the Turtles from a winning trade

I saw a recent tweet talking about how losing trades can be more instructional than winning trades. I happen to think that, for a trend follower, you can learn more from winning trades. 

A famous example of this is the heating oil trade taken by the Turtle traders, which occurred during their initial training period early in 1984.

Now, out of the group, the story goes that only one trader was able to get on a 'fully loaded' position and then fully follow the rules given to them by Richard Dennis and William Eckhardt - and that was Curtis Faith. And therein lies an important psychological lesson for people who are attempting to trade using a trend following approach.

Playing dumb in the markets

When trading I play dumb. What I mean by this is that I avoid pretending to be 'smart' by predicting what may or may not happen. The people who draw squiggly lines on a chart outlining future price action - how do they know? The future doesn't exist.

So, by playing dumb, I am letting the markets show me the way - I simply react to what is happening.