The expectancy gap and performance leaks

When trading, you are free to construct your own methodology and set of rules to use - what markets to trade, triggers for entries and exits, how much equity to risk etc. That's the easy part.
 
For the majority of us, the difficult bit is ensuring you keep operating within that framework.

Building your own approach to the markets and the decisions and actions you take are entirely within your own control. But you have no control over what the markets do. Ideally, you want to react to the market's price movements, and trade within the confines of your carefully constructed framework.

Letting the downtrends run

Having more losing trades than winning trades is to be expected as part of a trend following process. 

Part of the joy of trend following is that you never know when you will end up in a profitable trade, and once we do, we have no idea how long the trend will last for, and also how far price will move in our favour.

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.

Some thoughts on varying your position size

In my own trading, I use fixed fractional position sizing - that is, while the monetary value of risk per trade varies as my equity goes up or down, I risk the same amount in percentage terms.

A while back, a good trader friend of mine experimented with varying the percentage risk per trade based on a look back period of performance. 

Both methods have been used by successful traders and Market Wizards. Both have strengths and weaknesses.

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?

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:

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%.

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.

New testimonial

Recently I caught up with Craig, an experienced London-based trader who I have been working with for a couple of years, together with his trading partner Aaron, a for a day as part of the mentoring programme.

We had an exhaustive (and enjoyable!) session covering many topics, including further ideas about developing their edge, running multiple systems, correlation and 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:

Controlling your losses, good trades and bad trades

Good traders continually worry about trying to minimise any potential downside. By the same token, they try to avoid placing any restrictions on the potential upside.

Take the four possible scenarios on any individual trade: 

• Big win; 
• Small win; 
• Small loss; and 
• Big loss. 

Good traders try to avoid the big losses at all costs. If you have a robust trading approach that has a positive expectancy, then the small losses can easily be recovered from.

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.

Some thoughts on exploiting your edge

Traders who are successful over the long-term have clearly defined their 'edge' in the market or markets they trade. To me, an edge is basically a method that statistically generates a positive expectancy over a large sample of trades.

In order to capitalise on that edge, the trader needs to develop the ability to use that edge. This basically means that a trading plan which is constructed to exploit that edge is followed as closely as possible.

Spinning your wheel(s)

A few weeks back, I spoke to a trend follower who had been experiencing a frustrating period in the market. This particular individual previously worked in the City of London and has a strong regard for good risk control.

Unrealistic expectations

Someone who decides to trade using a trend following approach should expect to achieve a win rate between 30% - 40% across a large sample of trades. Depending on the parameters used, this could cover a period of several years.

If this were the case, then the sample would automatically cover the mixture of different market states, be it trending or non-trending, stable or volatile. You may also include in that period a sustained trend in a downward direction as well as an upward direction.

Reckless risk - and back to square one (again)

A while back, I talked about a long-time friend of mine and his battle against repeatedly losing all his hard earned gains in his own trading account (the original post is here).

I had not spoken to him for a couple of months, but he called me yesterday. Sadly, he had done it again. So what had he done this time?

Thoughts on what price action to focus on, timeframes and parameters

I've talked in the past here about how the indices are constructed, and given an argument as to why you may want to avoid following them 'parrot fashion'. It generated some interesting comments from readers, so it is worth a read.

Remember that, if you trade individual stocks, you are trading just that, and not the stock market as a whole. This point may well be anathema to a lot of people who trade using a 'top down theory' of analysis, and that's fine. I am simply putting forward a different point of view or belief.

Refining your own approach

In my garage, I have a dustbin full of old golf clubs. Mainly these are putters that have been tried for a short while before being discarded. As it is, I keep going back to a putter that I bought more than 20 years ago. Now, over time it has gone through many changes - the length of the shaft has been altered, weight has been added to the putter head, and there's been numerous changes backwards and forwards to the thickness of the grip.

While the 'old faithful' felt good to me when I originally bought it, those various changes have helped refine and 'personalize' it to my own preferences and mindset at that time.

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.