The Top 10 most read blog posts

It is amazing to me that, since starting this blog back in 2008, it has now received one million page hits.

The blog has morphed from initially being more of a diary of my own thoughts and my trading, to talking more about the general concepts involved in trend following.

While trading is one of the most popular keywords on any internet search, trend following is more of a niche area. To many, it is a marmite approach to the markets - you either love it or hate it.

My personal trendfollowing "A-ha" moments

Every trader on their own journey will encounter some lessons which are critical to their long-term development and ultimate success.

These will differ from trader to trader, as their own personality, beliefs, strengths, weaknesses and experiences are unique to them.

Below is a list of ten "A-ha!" lessons which I personally have learned from and helped shape my own beliefs about how best for me to trade:

Trend following and Epictetus

The stoic philosopher Epictetus once said that “We have two ears and one mouth so that we can listen twice as much as we speak.”

In the world of trading however, plenty of participants seem to think they have two mouths and one ear. They aren't interested in listening; they are simply wanting to speak - often over the market itself.

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.

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'.

Simplicity and robustness - with a word from Larry Hite

By their very nature trend following systems or methods are relatively simple pieces of coding. Read about some of the most successful trend followers in history, and they have even themselves referred to the fact that their rules could be written on the back of an envelope or the proverbial cigarette packet.

All you are trying to do is identify whether price is trending up, trending down or is stuck in a range. Once you have determined your timeframe, it is pretty simple to see that, and from there you can create your own parameters and rules.

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.

A tale of two setups

Rather than talk about the recent market shenanigans, the chart of the Dow covering the last few months offer us a good chance to compare a low volatility setup against a higher volatility setup.

Trading on your own two feet

Everyone talks up their own method of how to trade. I'm no different. I am unashamed fan of trend following, and hopefully this blog acts as a useful resource to those who favour a similar approach or who want to learn more about the basic concept.

But within that broad definition of trend following, people can easily tailor it to their own needs or requirements.

In my own case, trend following as a concept is a good match, based on my basic beliefs, the amount of time I want to spend in front of charts, and my family and other time commitments.

The timeframe I choose is also the best match for my personality - towards the shorter-term end of the trend following scale which stops impatience getting the better of me, but still long enough so that I can get into multiple-R profitable trades. It also has the benefit of getting out of losing trades quickly.

However, unlike other many other market participants, I know and accept there are many other successful traders who trade in a completely different manner to me.

From theory to practice - marching to your own beat

Yesterday I was asked an interesting question by an aspiring trader based in India who I have corresponded with for several months. I know he has eagerly been collating a lot of knowledge and information from a number of traders and resources over this period of time. Now he was basically asking me:

"How can I put all my trading knowledge into practice?"

The answer to this is a simple step-by-step process, which can be used by anyone in a similar position:

A lesson from Steve Jobs

When traders seek improvement, more often than not they will ADD something to their routine or method of selection, or maybe start putting extra indicators on their charts.

Yet most of the successful traders I've had the good fortune to speak to or correspond with only really hit their straps when they REMOVED the superfluous elements from what they were doing.

They developed an understanding of what were the important elements in achieving profitability. They found simplification and clarification in what they were trying to achieve. They got rid of the extra elements or chart indicators they didn't need.

They used Occam's Razor in their approach to the markets.

Now here's a suggestion. Why don't you take the same approach to your thinking?

Known unknowns and unknown unknowns

As traders, we have to accept that we do not know what is going to happen in the future. While our chosen method would look to to profit from an 'edge', based on some form of probability or odds (e.g. trends tend to persist until they don't), we should never approach the markets with an attitude that we can be sure what will happen from one minute to the next, one day to the next, or one week to the next.

Price action in an individual stock, forex pair or commodity can change behaviour at any time.

Therefore, we must account for that possibility in our own method, our mindset and our attitude towards risk.

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:

The breakout stop comes to the rescue (again)

In the second half of 2011, and in particular the last quarter, I was experiencing a frustrating time. The markets were volatile, and I suffered a number of trades where price initially broke out in my favour, only to sharply reverse and end up generating losses around a full -1R. This was because those trades had not been open a sufficient length of time for my trailing stop to start moving from its initial price level.

The trade that really stung was a long position in a small UK stock in November 2011. After initiating the trade, my open profits reached about +5R after only three days, yet my initial stop had not moved, based on the rules I used at the time. Then, price did a sharp about-turn, and three sessions later, I was stopped out for a full -1R loss.

After this happened, I retreated to cash and took a break to think.

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.

Trading and the butterfly effect

Have you ever considered how you could come across two or more setups that are seemingly identical, and yet one moves in one particular direction, and another moves in a totally haphazard manner, and possibly start to move in completely the opposite direction?

Mark Douglas gave the best answer to this question in Trading in the Zone. Basically his explanation was as follows:

The starting point for any trader - what are your beliefs?

I've talked in the past about the importance of constructing your own trading method which is based around your beliefs.

But how do you start this process?

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.

Taking action

Over the years, one thing I have found is that people are very good at talking about what they want to do. Following through and putting any plan into action is a different matter, though.

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.