New testimonial

 

Below is a testimonial received from Paul, who I have known for a number of years now and has continued to make progress as a trend follower:

What my trading rules are designed to do

Conceptually, robust trend following systems are designed around the basic principles of identifying and capturing directional price movement, without having layers of complexity or being tailored to individual markets.

This leads to volatility in the performance achieved, as market conditions move through phases of 'trendiness' and differing levels of price volatility, but that is the compromise to robustness.

Two Mice and a Maze

Today I came across an old analogy highlighting the dangers of curve fitting your approach too much: 

New testimonial

Craig is an experienced trader based in London who approached me a few months back to assist him with his trading development. He has been kind enough for forward the following testimonial:

Fiscal cliff and other market unknowns

The buzz words or phrase that everyone is referring to at the moment is 'Fiscal Cliff', and the possible impact it will have on the US economy, as well as the markets.

As it happens, the US indices have performed an abrupt about turn over the last few sessions of the year, and are now on short signals. Perhaps unsurprisingly, the major European indices are showing greater strength, but are also being dragged down in concert.

Finding the right method - for you

Anyone who has been around trading for a while will know that there are literally thousands of different ways to make money in the markets. Whether it be using trend following, counter-trend trading, scalping, using support and resistance levels, indicator based or any other method, what can be great for one person can be poison for another. Go read a book like Market Wizards and see the wide disparity in the methods employed.

The long and the short of it - reviewing trading performance

When it comes to reviewing my own trading performance, I try to be as objective as possible, therefore this summary will be in the same vein. When doing this exercise, my main concerns are to ensure that:

• I have obeyed my risk parameters, both in terms of individual trades as well as in terms of my portfolio;
• I have attempted to keep to a bias in my positions that coincide with the direction of the indices;
• The trades on entry satisfied the various criteria I stipulate;
• Stops are placed and updated correctly and observed when price hits them;
• That I have not made any irrational, emotion-driven snap decisions and overridden my system rules in any way.

Seeing what you want to see

When a position starts to go against you, it is very tempting to try and 'interpret' a chart in a manner that verifies keeping the trade open.  This is where traders try to use indicators as a 'crux' to justify keeping hold of their position - "I'm long, yet price is going down, but the RSI is saying it's oversold, so I'm okay" - that sort of thing.

A couple more long trades

I have not traded either of these UK stocks, but again both showed the common characteristics I look for when trying to identify potential new trends. Both of these gave valid signals on my system at the appropriate time, and have generated healthy profits several times bigger than the initial risk. Which as a trend follower, is all you want.

The journey to trading success

It is a well known saying that 90% of traders fail, quite often within a few months of starting. They are seduced (quite often by glossy marketing) into thinking that traders can generate significant amounts of money with little or no background knowledge, and dream of becoming millionaires, quitting their 'real' day jobs, and a life a plush houses and fast cars. The reality is very different.

A muddled picture

As the various charts shown below highlight, there has been a complete reversal in direction in many of the major instruments that I follow. The major indices, commodities, and forex pairs I keep track of (but do not trade) as they determine in which direction the bias for my individual stock positions should be.

What a great week - not!

If you asked a trend follower what is the worst set of market conditions they have to deal with, then clearly a non-trending, volatile state is top of the list. A close second to that, and which we have encountered over the last week, is the 'V' shaped reversal.

Trends vs value

Trend following is basically a timing mechanism that tells you when to go long or short on a particular market, as well as when to exit any existing positions. Some people do not like to trade unless they have an understanding of the reasons behind a move in a particular market, relying on some form of fundamental analysis for this. The danger with this is failing to heed the warning signals when an existing trend finishes and shows signs of reversing.

Stock selection

I've posted below two charts of UK stocks that a few weeks ago gave entry signals - one on the long side and one on the short. As you can see, both trades have done very well.

Learning the skills to be a trend follower

I had an interesting conversation today with one of the other traders in the mentoring programme, and the current state of the markets. Currently we are in the position whereby the US indices are on a short signal, yet this has not been confirmed by either the FTSE or the DAX, which are both showing higher relative strength, considering the still-fragile state of the Eurozone.

Having confidence in your method

Trend followers have a very simplistic view of the markets. We simply look at the trend of the price and follow it - if it's going up, we have a long bias, if its going down we have a short bias, and if it's going nowhere, then we can stay on the sidelines. All other sources of information can be ignored - price is all that matters.

Trend following, Jesse Livermore and natural disasters

This is not the easiest topic to write about, but with the happenings in the US this week I feel compelled to write about trading and natural disasters.

Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

Dealing with a losing trade

Historically, trend following strategies have been built on the premise that, although you may lose on the majority of the positions you take, the size of your winning trades you have is much greater. It is this that creates the overall positive expectancy of the system. This is quite a difficult picture for inexperienced traders to get their heads round - how can you make money if you lose on most of your positions?

Gulf Keystone Petroleum

I tried this particular stock from the long side back in July, which I was stopped out of pretty quick. After getting a signal just over a week ago I opened a short position which is now in profit. Again, a trend follower should be comfortable in trading in both directions. Providing there is a trend signal given, then that is the green light to enter a trade and see what occurs. And if we are wrong, then our risk control will take us out of the position with minimal damage to our portfolio.

All routes heading south

As mentioned in my recent posts the major US indices have been the weakest, with the Nasdaq leading the way. Today both the Dow and S&P have triggered short signals. The DAX also briefly gave a short signal before trying to rally (Dow and DAX charts below). The FTSE has not given a short signal as yet, but is now a lot closer to doing so.