On defining a trend, interpreting volatility and when to go fishing

Jesse Livermore aboard the Anita Venetian

"Your definition of trend is the smoothing method you use. The methods you use to define trend are entirely up to you, so you get to define trend any way you wish; everyone may have a different idea of "the" trend." - Ed Seykota.

My personal trendfollowing "A-ha" moments

Every trader on their own journey will encounter some lessons which are critical to their long-term development and ultimate success.

These will differ from trader to trader, as their own personality, beliefs, strengths, weaknesses and experiences are unique to them.

Below is a list of ten "A-ha!" lessons which I personally have learned from and helped shape my own beliefs about how best for me to trade:

Trend following and Epictetus

The stoic philosopher Epictetus once said that “We have two ears and one mouth so that we can listen twice as much as we speak.”

In the world of trading however, plenty of participants seem to think they have two mouths and one ear. They aren't interested in listening; they are simply wanting to speak - often over the market itself.

It is what it is

This is just a brief post, after seeing some comments on social media referring to the price action in the general markets (particularly in the US) today. 

I've seen some refer to it as 'ugly', while others are saying they have never come across price action like this, before looking to blame others for making price action react in a way which didn't conform with how they thought it 'should' have moved. 

Well, in answer to those:

The futility of predictions

Yesterday I had the misfortune to be copied in on an Facebook thread discussing an impending stock market crash, together with an invitation to join the group who were discussing it. 

This post had more than 200 comments from a number of traders covering the intricacies of the current economic climate and their opinions on this - most of which I didn't understand. 

Idly browsing through those comments wasted ten minutes of my life that I couldn't get back. But it did give me the inspiration for this post.

The payback for following your rules

Quite often I get into a trade where price starts moving nicely in my favour, before reversing and taking out my stop, leaving me with either a significant erosion of open profits, or may be even taking a small loss. 

Not very interesting or exciting I know, but that is what following my rules allowed me to get.

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:

A thought for you...

There is an old saying that we have two ears and one mouth, and we should use them in the same proportion. But in reality what happens is that people aren't listening; they are simply waiting for their turn to speak.

You can take this and put it into a trading perspective:

• Do you observe and accept what the market is showing you (which direction is price moving?); or
• Are you simply champing at the bit ready to impose your opinions on the market?

If people stopped trying to force themselves on the markets, saw price action for what it is, and acted on what they saw, it is my belief they would be more profitable.

Playing dumb in the markets

When trading I play dumb. What I mean by this is that I avoid pretending to be 'smart' by predicting what may or may not happen. The people who draw squiggly lines on a chart outlining future price action - how do they know? The future doesn't exist.

So, by playing dumb, I am letting the markets show me the way - I simply react to what is happening.

What traders could learn from Formula 1

There is an old maxim in racing that you need to be on the right tyres for the weather and the track conditions at that moment in time.

When Lewis Hamilton is on track, and sees a load of dark clouds suddenly appear overhead, he doesn't go sprinting into the pits to get his car fitted with rain tyres.

Traders, their beliefs and opinions, and what you can learn from Eckhart Tolle

"Accept, then act. Whatever the present moment contains, accept as if you had chosen it. Always work with it, not against it." - Eckhart Tolle

Every moment in the market is unique. Price can move in either direction in the next few seconds, the next few hours, the next few days, weeks or months. Despite what some people may say, you don't know what will happen. Price may be trending one direction on one particular timeframe, and could be trending in the opposite direction on a different timeframe. 

How you interpret what price is doing, and how reactive you are to any changes in price behaviour, will depend initially on those core beliefs you have about trading, and from there your own rules derived from those beliefs.

Having the freedom to switch direction - riding the bucking bronco

One of the skills an aspiring trend follower has to develop is being able to accept when he is wrong, and to switch directions if necessary. He attempts to ensure that his beliefs or opinions about what may (or may not) happen to a stock, index or instrument do not impact on his ability to follow the entry or exit signals presented to him.

What is your definition of trading success?

I came across an interesting discussion recently about success in trading. If you go and look around you can find dozens of different definitions as to what is success, not only in trading, but also life in general.

And, as with most discussions, everyone will have their own opinion or belief about how you define success, and it will almost certainly differ from the opinions or beliefs of others.

Reviewing your trading beliefs and rules

I had an interesting conversation the other day with another trader about their own beliefs in the markets, and how following these can help or even hinder you as a trader.

My own opinion (or belief!) is that whatever rules you have created are an attempt to formulate your own beliefs into a viable trading strategy. Those basic beliefs give you a framework, or an outline of the overall concept about your approach to the markets, and the specific rules you use add the meat to the bone of your basic idea.

Trend following on stocks can work - with certain changes

If you have read the Market Wizards series of books, then you will have come across a bunch of super-successful traders talking about what they do. Do they all trade the same way? Of course not. In fact, they all trade differently to one another in terms of their chosen timeframe, entry and exit rules, and the instruments they trade. But they all have developed the necessary psychological skills to succeed, along with incorporating strong risk management. These core elements are evident in every successful trader I can think of.

Trading and Napoleon Hill

The writings of Napoleon Hill contained in his book Think and Grow Rich have been popular amongst many successful people since they were originally published in 1937, and are just as relevant now as they were almost 80 years ago. If you are a trader struggling to make a breakthrough, below are some quotes from Hill that can hopefully inspire you:

Intellect, theory, risk taking and reality

From the outside, trading opportunities within the big financial institutions or investment banks seem to be a closed shop. I took a look at job opportunities in the City of London this morning and all of them seemed to want people who were educated to a degree level, and/or who already worked in a financial institution. This obviously rules out bozo's like me, who left school and didn't proceed into further education, or who have never worked within the industry.

Good letter writers write letters

"Market letters tend to lag behind the market since they generally respond to demand for news about recent activity. Although there are certainly important exceptions, letter writing is often a beginning job in the industry, and as such may be handled by inexperienced traders or non-traders. Good traders trade. Good letter writers write letters."

So said Ed Seykota famously in his Market Wizards interview.

Once in a while, I get chance to read some analyst or broker reports, be it relating to specific stocks, commodities or sectors, or general market conditions. How useful are these to a trader? How much reliance can you put on them?

15 thoughts to help you

1. You don't have a crystal ball, and therefore accept you cannot predict a non-existent future. All you can do is can place your bets, control your risk, and then sit back and watch what happens.
2. Price can only do one of three things: go up, go down, or go sideways. Ultimately, it is only when price moves that a profit or loss is generated. Therefore, as a trend follower it makes sense to focus your attention on price.

Profiting from market downtrends

Trend followers and their performance tend to stand out from the rest of the trading community during a severe downtrend. There are reasons for this. Firstly, they simply follow the direction in the market.

Secondly, they avoid trying to pick a bottom in a stock or instrument. Finally, they also know when to exit a position and avoid losing the bulk of their profits.