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.

An argument against market direction determining your bias

I've been pondering further the question of letting the general market direction determine your trading bias, against focusing solely on the price action of stocks that you are looking to trade.

Regular readers of the blog will know that I made the decision late last year to place less reliance on what the major market averages were doing, as I was not looking to trade them. I look to trade individual stocks based on what their own price action is telling me.

The discretionary part of my system

I do not blindly follow the signals my trading software gives me. The chart of Travis Perkins (LSE: TPK) below gives a good example.

A sell signal was given near the end of April, however I did not enter the trade. The reason is that the previous low from mid March could act as support (I've drawn a red arrow on the chart to show this level). As you can see, the share price did indeed bounce off that level. I would have waited for that support level to be broken before entering the position.