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.

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.

Two stocks, two earnings reports, two different actions

Here is the story of two stocks which, this week, announced earnings. I had long positions in both these stocks coming up to the announcements however my treatment of the two trades differed. But first, I will explain my general approach to trading stocks and earnings.

Trend following and the ‘V’ shaped reversal

Occasionally when utilising a trend following method you have to deal with a ‘V’ shaped reversal. This is where, after moving strongly in your favour, price decides to sharply reverse direction, before your trailing stop has had chance to 'lock in' the bulk of those gains.

This type of price reversal can be the bane of a trend follower. I know my own basic approach struggles with them.

How to keep open equity risk in check

In my own experience, the biggest problem I've seen with relatively inexperienced trend followers is the question of stop placement in an open trade. 

Most trend following systems are used on commodities, FX and indices. I tend to trade stocks, but there is an added complication here in the effect of opening gaps, widening of spreads etc, which need to be factored in when looking at stop placement.

There is a secondary question as well - the risk to your trading account increases when a position goes in your favour. Let me explain.