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:

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 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:

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.

Trading and the butterfly effect

Have you ever considered how you could come across two or more setups that are seemingly identical, and yet one moves in one particular direction, and another moves in a totally haphazard manner, and possibly start to move in completely the opposite direction?

Mark Douglas gave the best answer to this question in Trading in the Zone. Basically his explanation was as follows:

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.

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.