Developing your level of competence - which step are you on?

In trading, as in any walk of life, it takes plenty of experience to evolve from being unconsciously incompetent to unconsciously competent in what you are doing.

An example of how emotions can affect your risk to reward performance

A couple of years back I had a meeting with a trader who wanted to improve. He had taken a break from the markets, and came to me for help in putting together a clear plan in place with good risk management and having the right mindset at the top of his list of priorities.
I've talked in the past about how closely your attitude to risk can affect your level of emotional control, and ultimately your discipline, as a trader.

With this in mind, we talked at length about his previous trading experiences and in particular his most profitable trade, which was this set up on the a UK stock. Here is the chart:

Longevity is the key to success

For a trend follower, the lack of decent trends over the last couple of years or so in the stock markets was perhaps expected - 2008 on the downside, followed by 2009 and 2010 on the upside were fertile periods to profit from price trends. 2011 was a difficult year for me, whereas 2012 and 2013 offered favourable conditions.

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.

Not 'jumping off' the ride, and letting trades play themselves out

A trend follower never takes positions based on predictions or opinions about what may happen. Trend following is reactionary, and based on what price is doing - therefore price has to show some strength before you look to go long, or some weakness before you look to go short.

Just as importantly, trend followers never try and predict potential turning points in a market. There is a process where price can look to change trend from one direction to another - this can happen very quickly, or in some cases take several months! Generally speaking though, this takes time, and a single day's movement does not constitute a change of trend.

It is for this reason that trend followers never get out of an existing position at the extreme of the move. There is always a process of 'giving back' some of the open profits before an exit signal is triggered, and/or a change of trend is signalled.

Looking backwards to go forwards

The last few weeks have been a total washout for me. The volatility in the market (and in individual stocks) meant that I was getting hardly any setups to consider, let alone take - in either direction. As someone who follows price trends, this was a concern. The majority of stocks, as well as the general market averages have been trending downwards, so why was this?

Is this price action different?

My guess is that there are plenty of people trading now who didn't participate in the markets in 2008. Since the market bottomed out in March 2009, there has been a long uptrend, although the major averages have certainly struggled to make new highs in recent times.

Christmas 2015 offers

I have a selection of discount offers open on the e-book, 1-2-1 training and mentoring (both annual or quarterly instalment options) - click on the links for more details.

These will run until 31 December 2015.

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:

Marty Schwartz and the sunspot theory

Every so often you come across a post from a trader talking about a specific stock along the lines of "Is there a reason NOT to own XYZ plc?"

Whenever I see a question like that, it immediately sets off alarm bells, which more often than not are confirmed when you go and look at a price chart of the stock in question.

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.

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.

Let those profits run!

We have seen a volatile start to the new year in the major market averages. These gyrations in the market have been increasing in intensity and frequency over the last few months - pullbacks and sharp reversals have been seen in early August, the first part of October, mid-December and now from the beginning of 2015.

Given my own goal for this year of concentrating more on the price action in the stocks I am looking to trade rather than the indices, these market movements have been noted but have been of less importance and relevance to me than before.

As it is, one or two trades have failed (which can happen with any position), but my most profitable trade has continued to inch up regardless of the general market volatility or movement, and is now over +6R in profit on its own.

New testimonial

Stephen is a keen trader who freely admits he has struggled in the past with the risk and psychology aspect of trading, especially when it comes to letting profits run. Part of the reason for this was not having a clearly defined trading plan that he could follow.

Stephen closely follows the underlying fundamentals of the stocks he trades, and has filters he uses to narrow down the potential candidates. The trend following part of his overall plan will act as a timing device to get in and out of those stocks, helping him particularly in getting out of a profitable trade at the appropriate time.

He kindly sent through the following testimonial today:

Jesse Livermore speaks

While most people tend to think of Reminiscences of a Stock Operator when Jesse Livermore is discussed, he actually wrote his own book How to Trade in Stocks shortly before his death in 1940. This is a treasure trove of wisdom that, in my opinion, every trader should read. While not all elements of his particular trading method may suit everyone, the basic principles he talks about are most certainly relevant, and have influenced my own trading:

A trader's development - a case study

Below is a summary of a live case study in the development of an aspiring trend follower, who is one of the traders in my mentoring programme. As you will see, it has been a case of slow but steady development, a few 'A-ha!' moments along the way, combined with a desire and commitment to succeed.

Risk management - Tracking the trend

When talking about trend following people automatically think of the entry and exit rules with such a system.

How many traders though track the trend of their results for risk management purposes?

Some basic thoughts to consider

Despite what you may have read or heard, there is no single trend. There are countless trends, all in place at the same time, in both directions. Which trend you are following depends on the timeframe you choose to look at, the instrument you are following, as well as the rules you have in place to determine a trend.

You can only determine a trend once it is in place - all trends can only be fully identified in a historical context. Therefore, you create a set of rules that determine the potential start of a trend, use appropriate risk management, and see what comes of it.

Controlling the controllable

The markets can be an unpredictable beast. Inexperienced traders jump in and out of positions at every whim of the market. This shows itself with irrational, emotional decisions on every pullback or move forward, entering and exiting positions at the wrong time, with little or no additional thought to controlling risk. To take a well known analogy, the tail is wagging the dog. This process needs to be reversed, so that we put the trader back in control.

Ok, so what aspects CAN you control?

The KISS method of trading

I'm an advocate of the KISS method (Keep it simple, stupid!). I do not want to spend hours pouring over economic reports, company balance sheets, or any other form of fundamental data. Similarly, I place no reliance on technical indicators, which are lagging indicators, such as stochastics, RSI and the rest. There is only one piece of information that I look at - price. I used to track volume, but I found that didn't improve my results. So it's price, and price only.