A typical example of a losing trade cut short

Here is a typical set up which I opened a position last week and cut taking the small loss the following day.

There is nothing out of the ordinary in the set up on this stock - there has been some recent price strength, a pattern of higher highs and higher lows emerging, combined with a consolidation period where volatility (as shown by my Volatility Factor indicator) has contracted.

Current trades update and more potential setups

In this recent post I mentioned a couple of potential set ups I was watching as well as including the charts highlighting some recently taken trades. Here is an update, plus a few more setups which I've added to my watchlist.

Some recent entries and current watchlist charts

I have a number of specific rules which govern the type of price set ups I look for. To help me identify these I have developed and refined scans over a number of years.

My original scan codes only identified price breakouts at the point they occurred. This meant I had to be in front of the screen and see these pop up in real time so that I could get in close to the breakout level. I've now been able to re-code these so I can identify these set ups prior to breakout.

This enables me to enter stop orders on a Good Til Cancelled basis on the market open.

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.

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).

Another example of a nasty price gap

If you subscribe to the Mark Douglas theory that in the markets anything can happen, at any time, then you will know and accept the potential effect that sudden or unexpected announcements can have on price of a stock or instrument.

Seemingly you can be comfortably sitting in profit on a trade, even with your trailing stop above your entry price, only for a price gap to occur against you, resulting from the reaction to such an announcement.

It is for this reason why I never take into account open profits for position sizing purposes. A profit or loss on a position is not known until the trade is closed. Open profits can disappear - seemingly overnight with little or no warning, and your trailing stop may be rendered worthless.

New testimonial

A couple of weekends back, while on the train to London, I posted this up on Twitter:

The traders I was going to meet were Craig and Aaron, and our catch up marked the end of working closely together for three years.

Following that, Craig has now kindly forwarded the following note:

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.

Keep your eyes open for stocks bucking the trend

As a breakout trader, I only ever go long on new highs, or go short on new lows. Therefore, while the longer-term trend in the general market is still intact, the recent pullback or consolidation (not only in the major market averages, but more importantly in lots of individual stocks), in theory makes it difficult for me to participate.

One of the reason I am continuing to run through my scans and keeping my watchlists up to date is that you may find individual stocks that are bucking the trend, so to speak. 

If there is nothing to do, then do nothing

The last couple of weeks have been frustrating in that, while I have been able to identify plenty of interesting looking setups, they have either:

• continued to see price consolidate and are yet to trigger; 
• had earnings releases or trading updates; or 
• price has fallen away rendering the set up being no longer of interest. 

This has coincided with an uptick in volatility in the major market averages and a pullback from the recent highs.

Discount offer - 1-2-1 training and mentoring

To coincide with the commencement of the new trading record, I am running a discount offer for both 1-2-1 training and mentoring.

The prices for both these services has been reduced by 20%, and the offer runs until 14 November 2017.

For more details, please go here.

A couple of messy charts

If you are inclined to trade the indices, you may be familiar with the charts of the UK FTSE and the Australian ASX, which show a distinct lack of direction in recent months:

An example in trade management - the breakout stop

A few days back, I posted here about the potential long set up on Gold that was forming. Lo and behold, later that day price broke out.

Once you are in a trade, the next stage to consider is the ongoing trade management and the use of stops. So we will look at the updated gold chart (shown below) to see how I do this.

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.

Trading in the Zone - and some recent setups

While away for a recent holiday my reading material consisted of two classics by Mark Douglas - The Disciplined Trader and Trading in the Zone. For many Trading in the Zone this is the book that brought trading psychology to the masses.

Playing great defence

As a trader, I am always more concerned with how much I could lose on a trade than win. Good risk control certainly helps you with that, but there are some other ideas that can help you keep losses as small as possible. 

Here are some examples of playing 'good defence', as Paul Tudor Jones would call it, which have helped me as a trader.

2015 review - and an interesting question

Having now brought all my trading records up to date, and with no positions currently open, returns for 2015 total +36.82%. This equates to just over +16R. The full results are shown here, with the associated charts and graphs here.

In summary, the win rate has dropped a bit, but the profit factor (expressed in terms of R) has continued to increase, so that currently the average size of my winning trades is more than 5.2 times bigger than the average size of my losing trades.

When you are wrong, don't stay wrong!

In this recent post, I referred to Ocwen Financial Corp, a US stock that had been on my watchlist, and which broke out to new highs just ahead of earnings, triggering a possible entry.

Now, as I have mentioned numerous times, I do not initiate positions just ahead of such releases - the potential for price gapping against me is a risk I choose to pass on. My own belief is that is gambling, not speculating.

In this particular instance, price did gap down, which, had I taken the trade on the breakout, would have caused a loss greater than my initial risk.

But what if you did take the trade?

A couple of missed trades

NOTE: This post has been updated below following today's price action.

Although I have not been in the markets recently, it hasn't been totally as a result of sitting on my hands. The process of looking out for good setups has continued, and as previously discussed, most of these haven't triggered an entry signal. However, there are a couple of trades that have managed to get away from us, for different reasons:

Always think about the risk!

Traders are essentially risk managers – your goal should be to ensure any losses incurred are kept as small as possible. While sometimes this means we possibility miss out on some profits, the overriding aim remains that of avoiding big losses.

We have had two instances this week where thinking more about risk rather than potential profits has proved beneficial to us.