Ten years on - the critical lessons I learnt from 2008

Ten years ago the equity and financial markets were in the middle of an unprecedented period. My interactions with the markets around that time were the ultimate proving ground for putting into practice what I had learnt and developed over the previous few years, and my experiences over those few months helped propel me forward as a trend follower.

Some of it wasn't easy, and some lessons learnt (and re-learnt!) cost me money. But in the long run, the tuition fees paid have been covered many times over.

Here are some of the lessons I learned from that time, which still form part of my overall approach:

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.

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.

If there is nothing to do, then do nothing

The last couple of weeks have been frustrating in that, while I have been able to identify plenty of interesting looking setups, they have either:

• continued to see price consolidate and are yet to trigger; 
• had earnings releases or trading updates; or 
• price has fallen away rendering the set up being no longer of interest. 

This has coincided with an uptick in volatility in the major market averages and a pullback from the recent highs.

A positive start to 2017

Markets always go through different market 'states' - either trending or non-trending, stable or volatile.

During the last couple of years it has been difficult (but not impossible) in making money adopting a trend following approach, for me using my preferred timeframe and parameters. That is the nature of the beast. You cannot force the market to march to your beat. You can only take what it is prepared to give you.

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:

Stress testing yourself and your method - sowing the seeds of future success

These days, I always try to look at things from a positive point of view. Where others can only see the negatives or downside, I try to look for the potential upside or opportunities which may arise.

Attaining that mental state was not easy to achieve. In my early days as a trader, I struggled to keep my emotions and approach to risk under control - particularly when things went wrong. Things would get flung across the room, combined with a lot of negative talk and shouting, which can easily damage your self esteem. To change from a negative to a positive mindset took a lot of effort, but it has been crucial in helping me get to where I am today.

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.

20 truths about trend following

People are often attracted towards adopting a trend following because of its robustness and longevity, together with the returns it can generate.

This is no 'get rich quick' scheme - the basic concept has been proven to work over many decades, in up and down markets, and some of the most successful traders and Market Wizards have used it.

That said, it demands a lot from you. If you are considering adopting a trend following approach, here are some basic truths that you need to understand and accept:

Much ado about nothing

Well that's the first quarter wrapped up for 2016. And, as the metrics show, nothing much has happened in terms of performance. Looking at the monthly returns over the last year or so in particular, these losing months have been kept as small as possible. And, even after a period of non-performance, the returns on all closed trades is about 5R off of all time equity highs. Which, in the longer-term scheme of things, is nothing. One relatively decent trend will cover that.

As a comparison, below is a screenshot of the published monthly returns for Mark J Walsh & Co. While he was not one of the participants in the Turtles experiment from the 1980's, Walsh was an associate of Richard Dennis. You can view the monthly performance of other trend followers (including some of the former Turtles) here. 

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.

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.

A trend follower's first big win

Yet again the mentoring programme continues to deliver results. Here is an excerpt from an email I got a few weeks back from Paul, who is a trader based in Scotland:

A busy old time

The last 24 hours or so have been busy. Last night, we had our regular group webinar which lasted just under a couple of hours - always a good time and a great chance to bounce ideas around, look at lots of charts and discuss trading issues that have cropped up. 

It was clearly evident from the stocks we were discussing that the quality of setups they were looking at and taking have made a quantum leap forward en masse. It made me wonder how I missed taking some of them myself!

A great day

Yesterday I was able to travel to London and meet a couple of the traders in our mentoring group.

It was an interesting meet up for me because both of these guys are in the IT industry, and have used their own skill set to enhance their own trading approach or routine. 

Learning from past mistakes - and the markets

For those who have not traded through such a period in the markets before, you have been all geared up for an important educational experience over the three months or so. We have seen a big jump in volatility, combined with a sharp move to the downside followed by a 'V' shaped reversal in the general markets. Ideally, when experiencing these changes in the market state you want to keep your tuition fees as low as possible.

Does your timeframe fit your personality?

I was talking to an aspiring fellow trend follower recently about the difficulty he finds in staying in his winning trades.

I have found this is a common problem among people new to trend following. It seems that human nature is almost forcing or daring you to snatch profits while they are there, for fear of seeing them evaporate.

However, if you do that, you are cutting your winning trades short. This in turn destroys the positive expectancy that a decent trend following approach should be able to generate.

Accepting the bumps along the way

If you think you can adopt a trend following approach, and then guarantee that you can pull X% out of the market each month/quarter/year, then you are very much mistaken. Your performance when utilising a trend following strategy will go through peaks and troughs. There may be periods when you are fully invested (up to your own portfolio risk limits), and there may be times when you are fully in cash.

Look at any performance record of a trend follower and you can quickly identify these peaks and troughs. Why do these happen? Very simply, trend followers need trends in whatever markets they are trading to appear. If they don't, then a trend follower will struggle. That you have to accept.

How my trading approach suits my personality

We as individuals all have our own personality traits and characteristics. Sometimes you have to learn and overcome some of the issues these can create. However, sometimes a way forward can be shaped which embraces these traits.