Some recent entries and current watchlist charts

I have a number of specific rules which govern the type of price set ups I look for. To help me identify these I have developed and refined scans over a number of years.

My original scan codes only identified price breakouts at the point they occurred. This meant I had to be in front of the screen and see these pop up in real time so that I could get in close to the breakout level. I've now been able to re-code these so I can identify these set ups prior to breakout.

This enables me to enter stop orders on a Good Til Cancelled basis on the market open.

Sticking with the process

My historical win rate is about 30%, so with the majority of my trades generating losses, I have learnt to accept losing money along the way.

To me, what is far more important than the monetary outcome of any one trade is whether I am sticking to my process and my execution:

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:

Losses and Whipsaws - one good trend pays for them all!

Any aspiring trend follower should expect runs of consecutive losing trades to be the norm, interspersed with the occasional small winner and, every once in a while, a big winner.

At some point, most people tend to look for some silver bullet to eliminate at least a chunk of those losing trades, and get the win rate up to 50% or even better.

But the harsh reality is that, throughout history, the most successful trend followers have prospered with a typical win rate of between 30% to 40% - irrespective of timeframe, or the markets traded. That, combined with a method allowing the cutting of losses and the ability to let profits run is from where the positive expectancy of the approach comes.

Some words of wisdom from David Druz

David Druz is a long-time trend follower who was the first mentee of Ed Seykota. He has run Tactical Investment Management since the early 1980's. Here are some of his nuggets of wisdom:

Experiencing the first big winning trend

When a trader starts adopting a trend following approach, there can be a steep learning curve in terms in truly understanding the ups and downs they will experience - both in terms of open equity and the emotions involved. 

Aspiring trend followers will more often than not go straight into a drawdown on cash equity. This is due to them adopting the basic principles of cutting losses short and letting profits run, combined with the low win rate that is typically achieved. 

My observation is that people quickly develop the need for good risk control and the cutting of losses, but by far the most challenging aspect of a trend following approach is the ability to remain faithful to your exit rules once you get into a profitable trade.

Letting the downtrends run

Having more losing trades than winning trades is to be expected as part of a trend following process. 

Part of the joy of trend following is that you never know when you will end up in a profitable trade, and once we do, we have no idea how long the trend will last for, and also how far price will move in our favour.

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.

Some thoughts on varying your position size

In my own trading, I use fixed fractional position sizing - that is, while the monetary value of risk per trade varies as my equity goes up or down, I risk the same amount in percentage terms.

A while back, a good trader friend of mine experimented with varying the percentage risk per trade based on a look back period of performance. 

Both methods have been used by successful traders and Market Wizards. Both have strengths and weaknesses.

The Golden Rule

I would be considered by many to be a loser at trading. This is on the basis that I have far more losing trades than winners. And, if that metric alone determined whether someone is profitable or not, then they would be right.

But fortunately, they are not. Because I use what Van Tharp calls 'The Golden Rule'. It has been around for more than 200 years. Trend followers swear by it. If you can use it, you can make money. What is it?

Richard Dennis, trend following and leaving your ego at the door

The siren call of the high win rate strokes the ego of many traders, and this causes internal conflict amongst people who aspire to be trend followers.

Left unchecked, the ego within us would make the desire to be seen to be right its primary focus, rather than to make money. But this goes against the grain when it comes to trend following, where the typical win rate can be between 30% - 40%.

Jack Nicklaus and trading - part 2

One of the most popular posts on this blog is 'Jack Nicklaus and trading', where I listed a number of quotes the Golden Bear made over the years. These should have a particular resonance when placed in a trading context, be it your own approach to the market, or the psychology involved.
Below I've pulled out a few more of Jack's quotes, which again may require some thought on your part, but the underlying message can easily be applied to trading.

Trend following, unrealistic expectations and a look into a fund's performance

Some people have unrealistic expectations when it comes to trend following - and trading in general, for that matter. 

I remember a trader contacted me once about some mentoring and essentially was looking for some assurance that, if he adopted a trend following approach, he would be able to make a +100% return over the next year.

Spinning your wheel(s)

A few weeks back, I spoke to a trend follower who had been experiencing a frustrating period in the market. This particular individual previously worked in the City of London and has a strong regard for good risk control.

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.

2015 review - and an interesting question

Having now brought all my trading records up to date, and with no positions currently open, returns for 2015 total +36.82%. This equates to just over +16R. The full results are shown here, with the associated charts and graphs here.

In summary, the win rate has dropped a bit, but the profit factor (expressed in terms of R) has continued to increase, so that currently the average size of my winning trades is more than 5.2 times bigger than the average size of my losing trades.

How my trading approach suits my personality

We as individuals all have our own personality traits and characteristics. Sometimes you have to learn and overcome some of the issues these can create. However, sometimes a way forward can be shaped which embraces these traits.

Always think about the risk!

Traders are essentially risk managers – your goal should be to ensure any losses incurred are kept as small as possible. While sometimes this means we possibility miss out on some profits, the overriding aim remains that of avoiding big losses.

We have had two instances this week where thinking more about risk rather than potential profits has proved beneficial to us.

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.

A couple of recent trades

Below are the charts for the two most recent trades that have been closed, both for a profit. I have highlighted the relevant entry and exit points.

First to go was Nordic American Tankers, and we can see price fell quite a way below my exit point before recovering back in recent days to around the level where I was stopped out. Once a trade is exited, subsequent price action is of no concern to me - I move onto other opportunities.