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:

The Top 10 most read blog posts

It is amazing to me that, since starting this blog back in 2008, it has now received one million page hits.

The blog has morphed from initially being more of a diary of my own thoughts and my trading, to talking more about the general concepts involved in trend following.

While trading is one of the most popular keywords on any internet search, trend following is more of a niche area. To many, it is a marmite approach to the markets - you either love it or hate it.

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.

Some thoughts on defining market states

When people talk about the four market states, typically they refer to these as trending, non-trending, stable (low volatility) and volatile.

However, what you need to consider is there is no definitive answer to how you identify each state, and the answer may differ from trader to trader.

Trend following, simplicity and robustness

"We have a saying here: "It is incredible how rich you can get by not being perfect." We are not looking for the optimum method; we are looking for the hardiest method. Anyone can sit down and devise a perfect system for the past." - Larry Hite

As a trend follower, it is important to acknowledge and accept that individual stocks making up the 'stock market' are in a constant state of change themselves, be it trending or non-trending, and all with differing levels of volatility, as well as the indices themselves, along with foreign exchange, interest rates, commodities etc.

Trend following, robustness and adapting to market conditions

There is a school of thought amongst some traders which says you need to adapt and adjust your chosen method, in response to changes in the market environment. These might relate to the markets you trade switching from a trending to a non-trending state, or from suffering varying levels of volatility. 

Against this, others will say having to go through this process on a regular basis indicates possible over-optimization and a lack of robustness in your method.

A trader's development - a case study Part 2

Back in the summer of 2013, I wrote this post about an aspiring trader called Tom (not his real name) who I first met in early 2012, and gave a potted history of how he had developed as a trader over that period of time. Tom was the first trader that I mentored. This post now updates that story...

Discount offer - 1-2-1 training and mentoring

To coincide with the commencement of the new trading record, I am running a discount offer for both 1-2-1 training and mentoring.

The prices for both these services has been reduced by 20%, and the offer runs until 14 November 2017.

For more details, please go here.

Coming up - new trade record

Regular readers of the blog will know that I kept track of all trades taken and the associated performance metrics covering the period July 2012 to April 2017, at which point I took a short break from the markets.

PDF copies of those records are available here.

This covered the good, the bad and the ugly of trend following. Sure, there were losing trades (lots of them!) and losing phases, but that is the nature of the markets, and typical of this type of approach to trading.

Despite a win rate of only 30%, the annualised returns equated to almost +75%, with an overall return of +470%.*

This can only be achieved by following the time-honoured principles of trading breakouts, cutting losses, letting your profits run and using good risk control.

As from 01 November, I will be starting a new record of all trades taken going forward, with all of the same metrics.

Some thoughts on differing trend following performance

Even if you adopt a trend following method, the nature of the price action in the markets traded will affect the performance that different trend following methods can achieve.

Thanks to Michael Covel's excellent book on the Turtles, we can review the performance achieved by those traders*. And we can see that, even though they were all looking at the same basket of instruments, the traders achieved wildly differing results.

2016 - a losing year

So that's 2016 in the book, and a losing year at that. This is my first losing year since 2011. The fact that I have lost less than five years ago shows to me that the changes I put in place in the early part of 2012 helped to limit those losses - together with the additional experience and education dished out by the market!

As I talked about here, even the most successful trend followers suffer the occasional losing year, so I am totally relaxed about it. It is what it is. I can't change what has happened, or the decisions I made - I can only go forward.

Gearing up for 2017

In recent months, one of the most popular posts on the blog has been 'Trend following is dead - apparently...'

I wrote this back in 2010, based on the fallacy that every few years, people talk about how trading trends no longer works, trend following is so 1980's, etc. All this talk usually coincides with a period of poor or non-performance.

We know that markets always go through different market 'states' - either trending or non-trending, stable or volatile. What we don't know is when they will move from one state to another. And when they do start to trend, we can never predict the magnitude of the resultant trend.

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.

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.

The reality of trend following

Look at the performance records of some of the successful trend followers over the last 20+ years. You will see that there are plenty of losing months - as well as losing years.

These are people who have been successful over the long-term. Yet, how many individual traders do you know who are able to go through losing months or years? Some can't even stomach a losing week before they want to ditch a proven method and jump on the holy grail seeking wagon.

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.

Three year performance review

The end of June marks the completion of the third year since I changed my stop rules back in the summer of 2012. The results achieved I think speak for themselves - despite getting into winning trades only a third of a time, and enduring a horrible run of losing trades last year the annualised return over the three years equates to just under 80%.

The source of your profits

Occasionally I come across traders who seem to take great delight in criticising or rubbishing certain elements of another trader’s approach to the markets or their trading rules, which may have formed an important part of that trader's success over a long period of time.

It is very difficult to critique anyone else's general approach or a specific rule they use, unless you know their complete trading plan, their attitude to risk, their beliefs and mindset, as well as their performance.

The reality of a losing streak

As the various metrics and graphs here show, performance has been pretty poor over the last four months or so.

The reality, however, is that you have to accept that markets move from trending to non-trending phases. In that period, the markets have continued to show a potential disconnect, even if some are at or close to all time or multi-year highs. Market conditions have not been favourable for my particular style of trading, and my preferred timeframe, for most of the year.

No one like a run of losing trades. Yet they have to be expected.

If it works - do it!

If you have found a trading methodology that generates positive returns, suits your personality and risk profile, then you have found your own trading holy grail.