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.

The joy of helping an aspiring trend follower

A while back I received an urgent message from one of the traders in my mentoring group. He managed to get himself into a trade where a trend had developed in his favour and was now (in his words) "going parabolic". 

This person had been developing his method over a period of time, so that it best meshed with his full-time job, which in a pre-COVID world demanded long hours and lots of transatlantic travel. As a result, his chosen timeframe and parameters are somewhat longer-term than my own, but the underlying principles remain exactly the same.

New testimonial

Just before Christmas I received the following from Stefan, an aspiring trend follower based in Germany:

New testimonial

This week I received the following testimonial from Stephen, who I have now known for a number of years and has been an active member within our small group of traders:

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:

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).

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:

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.

A huge multiple R winner

David came to me just over a year ago for some 1-2-1 training, after I was recommended to him by another trader.

It has been interesting to see how his trading has developed since then, and how he has dealt with suffering a high proportion of losing trades. With a trend following approach, that is to be expected, but as I explained here, it is critical to also let winning trades run, as you never know which set up will generate a huge winning trade.

Adding some accountability to your trading - helping a day trader to improve

A while back I was approached by a day trader who wanted some help in improving his performance. This took me back a bit - as readers of this blog may know, when I started trading back in 2003 it was as a day trader (and I initially struggled) before I got into trend following.

I've long believed that the essentials of good risk management and being able to avoid mental errors are applicable to ALL types and styles of trading. This would therefore be an interesting exercise - for both of us.

New testimonial from Germany

Julian is trend following trader from Germany who I have worked with over the last couple of years. Here is his testimonial which he kindly forwarded:

An example of how emotions can affect your risk to reward performance

A couple of years back I had a meeting with a trader who wanted to improve. He had taken a break from the markets, and came to me for help in putting together a clear plan in place with good risk management and having the right mindset at the top of his list of priorities.
I've talked in the past about how closely your attitude to risk can affect your level of emotional control, and ultimately your discipline, as a trader.

With this in mind, we talked at length about his previous trading experiences and in particular his most profitable trade, which was this set up on the a UK stock. Here is the chart:

New testimonial

Over the bank holiday weekend I received the following testimonial from Mark:

“I have been in the Steve’s mentoring programme for just over 4 years. Quite simply: as a result of his fantastic mentorship my trading has completely evolved and ultimately become consistently profitable.

Regardless of the trend following method used, I have learnt the importance of psychology and risk control and that they are and will remain paramount to profitable trading.

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.

New testimonial

Craig is an experienced trader based in London who approached me a few months back to assist him with his trading development. He has been kind enough for forward the following testimonial:

Bucking the trend

What a start to 2016! The markets have certainly been 'interesting' to say the last, with the major market averages taking a bit of a hit.

As always, no-one knows what will happen over the coming weeks or months. All trend followers will do is follow price action. 

One thing that people who trade individual stocks should look for, is decent set ups and signals given which seemingly are going against the general market - if you will excuse the pun, they are 'bucking the trend' of the market as a whole. These signals can often deliver wonderful results. What these stocks are doing is exhibiting a high level of relative strength or weakness compared to the market.

Christmas 2015 offers

I have a selection of discount offers open on the e-book, 1-2-1 training and mentoring (both annual or quarterly instalment options) - click on the links for more details.

These will run until 31 December 2015.

A frustrating week - and a look at stops

Last week was a frustrating week. At one point I had three positions open but by the end of the week I was back to being 100% in cash. Lets look at what happened:

Discount offer on mentoring due to expire shortly

Just a short reminder that the current offer on mentoring expires at the end of the month.

Here are some testimonials from traders past and present who have been in our group, and who I've had the good fortune to help and assist.

If you would like any additional information please contact me at info@thetrendfollower.com.