New testimonial

This week I received the following testimonial from Stephen, who I have now known for a number of years and has been an active member within our small group of traders:

A famous lesson for the Turtles from a winning trade

I saw a recent tweet talking about how losing trades can be more instructional than winning trades. I happen to think that, for a trend follower, you can learn more from winning trades. 

A famous example of this is the heating oil trade taken by the Turtle traders, which occurred during their initial training period early in 1984.

Now, out of the group, the story goes that only one trader was able to get on a 'fully loaded' position and then fully follow the rules given to them by Richard Dennis and William Eckhardt - and that was Curtis Faith. And therein lies an important psychological lesson for people who are attempting to trade using a trend following approach.

Improving your emotional control

A few weeks back, a trader friend of mine sent me the following message: "Just had my best ever trade...well, was a full -1R loss in record time!"

When I read this I thought he was being sarcastic, however he went on:

"There were f*** all emotions. Didn't hesitate on the exit, didn't think - just acted".

I've known my trader friend for a few years now. He actually has more experience in the markets than me, and has developed his own method, but he is continually learning and trying to develop himself as a trader. He has also been consistently profitable.

So why did he think this was his best ever trade?

Some thoughts on exploiting your edge

Traders who are successful over the long-term have clearly defined their 'edge' in the market or markets they trade. To me, an edge is basically a method that statistically generates a positive expectancy over a large sample of trades.

In order to capitalise on that edge, the trader needs to develop the ability to use that edge. This basically means that a trading plan which is constructed to exploit that edge is followed as closely as possible.

A reality check - looking at drawdowns

Quite often I meet or correspond with people who seem to think that they can pull a certain amount out of the market on a regular basis. This is impossible - particularly when using a trend following method. 

Depending on your timeframe and parameters, you can easily go weeks, months or even years before new equity highs are made. Therefore, you will actually spend the majority of your time stuck in a drawdown. 

For a lot of people who may be attracted to the potential overall returns of a method, the reality of what you have to go through in terms of drawdowns (both in monetary and time terms) to achieve those returns can be difficult to accept.

What you can learn from Mark McCormack

Mark McCormack and Arnold Palmer

Mark H McCormack was a business pioneer. He created the International Management Group in the early 1960's - his first client was Arnold Palmer, closely followed by Jack Nicklaus and Gary Player.

The starting point for any trader - what are your beliefs?

I've talked in the past about the importance of constructing your own trading method which is based around your beliefs.

But how do you start this process?

Unrealistic expectations

Someone who decides to trade using a trend following approach should expect to achieve a win rate between 30% - 40% across a large sample of trades. Depending on the parameters used, this could cover a period of several years.

If this were the case, then the sample would automatically cover the mixture of different market states, be it trending or non-trending, stable or volatile. You may also include in that period a sustained trend in a downward direction as well as an upward direction.

Working on yourself

In my previous post, I talked about ensuring you take action, after having a clear plan in place. 

But, for many, this is where any psychological issues start to rear their head, as you start to implement your plan with real money at risk in the market.

Most people solely focus on trying to develop a method that can generate profits from the markets. But, how many market participants do you know who spend just as much time (if not more) working on themselves?

Taking action

Over the years, one thing I have found is that people are very good at talking about what they want to do. Following through and putting any plan into action is a different matter, though.

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:

Reckless risk - and back to square one (again)

A while back, I talked about a long-time friend of mine and his battle against repeatedly losing all his hard earned gains in his own trading account (the original post is here).

I had not spoken to him for a couple of months, but he called me yesterday. Sadly, he had done it again. So what had he done this time?

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.

Slave to the system

Whenever a trend follower captures a big winning trade, outsiders often wonder if it down to pure luck, skill or something else?

In a lot of cases, trends can start to develop in spite of the current sentiment and beliefs of many of the market participants.

Trend followers however approach the markets in a unemotional state - if their method tells them to enter a trade at a certain price level, they enter. Similarly, if their method tells them to exit at a certain price level, they exit.

Refining your own approach

In my garage, I have a dustbin full of old golf clubs. Mainly these are putters that have been tried for a short while before being discarded. As it is, I keep going back to a putter that I bought more than 20 years ago. Now, over time it has gone through many changes - the length of the shaft has been altered, weight has been added to the putter head, and there's been numerous changes backwards and forwards to the thickness of the grip.

While the 'old faithful' felt good to me when I originally bought it, those various changes have helped refine and 'personalize' it to my own preferences and mindset at that time.

Some thoughts on stops

There are some inexperienced traders out there who seem to have a strange attitude towards the use of stops. A stop should be based on a price level where:

a) their trade idea should be proven to be invalidated;
b) the loss incurred tallies with the pre-determined amount they are prepared to lose on that trade.

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:

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.

Pain and pleasure - The Dickens Pattern for traders

Recently I came across my copy of Awaken the Giant Within, by Tony Robbins. I originally bought the book 10 years or so ago, but after reading it once, I pretty much forgot about it until I came across by chance, gathering dust.

Over the last few years, I've become greatly interested in the whole self-help/psychology sphere and the impact it can have on a traders' mindset. This can ultimately determine whether a trader will become successful or not in the long run. And, in the meantime, I've read a whole bunch of books related to that topic. Re-reading Robbins' book shows where a lot of these ideas originally came from or became popular.