New testimonial

 

Below is a testimonial received from Paul, who I have known for a number of years now and has continued to make progress as a trend follower:

Current market volatility and staying the course

In the last couple of weeks we have seen an ever-increasing level of volatility within the context of a sharp drop in price in the major market averages.

We have also started to see intervention in the markets by governments and regulators - additional liquidity being provided and interest rate cuts, as well as market trading halts (up and down) being triggered and the introduction of short selling bans on certain stocks.

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:

Using Bitcoin as an example of why I love volatility contraction

On my last post, I talked about the recent big winning trade in Bitcoin on the long side from earlier this year,which generated a +21R profit. Yesterday, Bitcoin gave a short signal as price dropped. 

Would I have taken this signal? 

No. 

Let me explain why.

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.

A look at some recent trends in other markets

While my primary focus is stocks, I do keep an eye on other markets for potential trades - these include commodities like oil and gold, the stock indices, some of major forex pairs and cryptocurrencies. 

It is more unusual for me to get setups which meet my own criteria in these markets, but they do add some diversification to what I do.

Below are some charts showing some recent trending movements in these markets, as well as highlighting some of the aspects I look for when taking a trade (or not).

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.

The futility of predictions

Yesterday I had the misfortune to be copied in on an Facebook thread discussing an impending stock market crash, together with an invitation to join the group who were discussing it. 

This post had more than 200 comments from a number of traders covering the intricacies of the current economic climate and their opinions on this - most of which I didn't understand. 

Idly browsing through those comments wasted ten minutes of my life that I couldn't get back. But it did give me the inspiration for this post.

A trader's development - a case study Part 2

Back in the summer of 2013, I wrote this post about an aspiring trader called Tom (not his real name) who I first met in early 2012, and gave a potted history of how he had developed as a trader over that period of time. Tom was the first trader that I mentored. This post now updates that story...

Some random charts

It's been a while since I have posted some random charts, but here goes:

It is interesting to note the pattern currently developing in the German DAX. You can clearly see the 'staircase' of higher and higher lows in place from early December last year before price stopped moving up in June.