- Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
- To avoid whipsaw losses, stop trading.
- Risk no more than you can afford to lose and also risk enough so that a win is meaningful.
- Trend following is an exercise in observing and responding to the ever-present moment of now.
- Fundamentalists and anticipators may have difficulties with risk control because a trade keeps looking ‘better’ the more it goes against them.
- Until you master the basic literature and spend some time with successful traders, you might consider confining your trading to the supermarket.
- I don’t predict a nonexisting future.
- It can be very expensive to try to convince the markets you are right.
- The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.
- Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
- I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
- A fish at one with the water sees nothing between himself and his prey. A trader at one with his feelings feels nothing between himself and executing his method.
- It’s all about sticking to your plan and experiencing feelings as they arise. If you are unwilling to feel your feelings, the temptation is to avoid them by jumping off your system.
- Traders and Surfers both have to deal with feelings of missing out on the small ones, until the big one comes along. They also have to deal with feelings of staying with the big one.
- Feelings you dislike, grow stronger; the feelings you like disappear, leaving you wiser.
- The turning point in the Process occurs when you become willing to feel a historically unpleasant feeling.
Saturday, January 28, 2012
A trading legend speaks
A small collection of quotes from Ed Seykota, the famed trend follower profiled in Market Wizards, whose writings and success are a continuing source of inspiration to me:
Some more nice trends
Another couple of great trending UK stocks based on my standard system. Remember that no-one knows what will happen when you open a position based on the potential of such a trend forming. You simply place your bets and go along for the ride. Using scans to identify any potential opportunties that meet well thought out criteria will save you time and ensure that all possible entries are identified. It is simply then a question of opening a position and then having the patience to let things play until the time to react to an exit signal. I did not trade either of these stocks, but these are great examples of what can be achieved in a relatively short space of time.
Friday, January 27, 2012
A trend and a half...
I was talking to another trader the other night about the longer term system I am now using and he was interested in what gold was showing on the chart. As you can see below, it shows that the trend has been in place now for 3 YEARS! I would say that the price has feathered the exit point a couple of times within the last year or so but it just shows how trends can persist over a long period of time, and also highlights the folly of selecting a price target for your trades.
Thursday, January 26, 2012
The market is saying the trend is up...
Despite all the prophets of doom and gloom around, the markets are signalling that the trend appears to be upwards at the moment. This long signal has been showing on the standard system for a number of days now, and as of today, the longer term system is also showing a long signal.
There have been plenty of individual shares performing well this month - hopefully this is the harbinger of a 'trendier' 2012...
Remember that trend followers do not predict market direction, or set profit targets. We simply follow the beat of the market, and react to price. We also do not believe in the terms 'overbought' or 'oversold', nor do we look to trade reversals by trying to pick market tops or bottoms - we simply look at the price action and determine if there is a new trend forming, and if that is the case, we take a position until such time when that trend finishes.
Those predicting a sharp fall in the markets in 2012 may be right - given time. That will be when the markets signal that the current uptrend has finished and been replaced with a new downtrend. Until that point we are simply following the market.
The beauty in trend following is it's simplicity. No mass of conflicting indicators on your charts, no talking heads on CNBC and Bloomberg to listen to - you simply need to follow the one metric that everyone can follow and understand - price. You can also structure your day so that, by leveraging your computer time using appropriate stock scans, you can operate a trend following strategy in a matter of minues per day without having to aimlessly trawl through hundreds of unsuitable candidates.
If you would to know more about how to trade using the trend, then consider either purchasing my e-book, joining myself and other traders in the members area, or even undertaking some 1-2-1 training suited to your own needs.
Remember that trends always occur after a period of consolidation or uncertainty. After a relatively trendless 2011, the potential is there for a significant move in the markets in 2012 - make sure you are ready to profit from this.
There have been plenty of individual shares performing well this month - hopefully this is the harbinger of a 'trendier' 2012...
Remember that trend followers do not predict market direction, or set profit targets. We simply follow the beat of the market, and react to price. We also do not believe in the terms 'overbought' or 'oversold', nor do we look to trade reversals by trying to pick market tops or bottoms - we simply look at the price action and determine if there is a new trend forming, and if that is the case, we take a position until such time when that trend finishes.
Those predicting a sharp fall in the markets in 2012 may be right - given time. That will be when the markets signal that the current uptrend has finished and been replaced with a new downtrend. Until that point we are simply following the market.
The beauty in trend following is it's simplicity. No mass of conflicting indicators on your charts, no talking heads on CNBC and Bloomberg to listen to - you simply need to follow the one metric that everyone can follow and understand - price. You can also structure your day so that, by leveraging your computer time using appropriate stock scans, you can operate a trend following strategy in a matter of minues per day without having to aimlessly trawl through hundreds of unsuitable candidates.
If you would to know more about how to trade using the trend, then consider either purchasing my e-book, joining myself and other traders in the members area, or even undertaking some 1-2-1 training suited to your own needs.
Remember that trends always occur after a period of consolidation or uncertainty. After a relatively trendless 2011, the potential is there for a significant move in the markets in 2012 - make sure you are ready to profit from this.
Sunday, January 22, 2012
It's not rocket science
A lot of successful trend followers are unknown to the public - some of the most prolific earners have never been mentioned on CNBC, Bloomberg or in the mainstream financial press. Others have become well known due to books such as Market Wizards, Trend Following and the story of the Turtle Traders. Fashions come and go in trading, but trend following manages to stay the course.
These individuals are the equivalent of the trading underworld. Ask yourself who profited from the following:
These individuals are the equivalent of the trading underworld. Ask yourself who profited from the following:
- The sharp rise and subsequent collapse of Enron;
- The dot com bubble;
- The 2007-08 subprime mortgage fiasco and the subsequent financial collapse in 2008;
- The prolonged uptrend in gold;
- The collapse of Barings Bank;
- The 1997 Asian contagion;
- The 1987 rise and subsequent market crash;
- The 1973-74 bear market
Want to make big money?
In late 1999 and early 2000, there was a tremendous advance in the markets with the advent of the dot com bubble. Millions were made as high momentum stocks rose steeply, seemingly with little or no substance to their underlying fundamentals in a lot of cases.
More cautious investors and traders stayed away from these stocks as a result, and missed out on those huge profits.
During this period, trend following was seen as 'old school', and out of date with the modern market.
However, in early 2000 the markets peaked, and then proceeded to fall sharply as the dot com bubble well and truly burst, and the bear market took hold. A lot of those same traders lost a substantial sum of those paper profits, as they had no suitable exit strategy. Some even ended up riding those stocks all the way up, and then back down again.
At the same time, trend followers had safely banked their profits generated before the bubble burst, and were now either out of the market or were making even more money on the short side as the bear market took hold.
Roll forward to 2008 and then 2009, and the situation was turned on its head. Trend followers simply followed what their systems were telling them, and made huge profits on the short side, before changing horses in the spring of 2009 as the general market trend turned upwards.
The fact of the matter is, by simply following the trend, and having a sound trading system, you can make money when the markets are trending upwards OR downwards.
As I've mentioned on numerous ocassions, the most difficult markets for trend followers are where there is simply no trend to follow. But then, all you can do is to act when a trend signal is given, and wait and see if a meaningful trend develops.
This means that I will never get in a positions right at the top or bottom, but by the same token, I will make the big money when a significant trend occurs, as I have clearly defined rules for when to enter, and more importantly, when to exit a position.
More cautious investors and traders stayed away from these stocks as a result, and missed out on those huge profits.
During this period, trend following was seen as 'old school', and out of date with the modern market.
However, in early 2000 the markets peaked, and then proceeded to fall sharply as the dot com bubble well and truly burst, and the bear market took hold. A lot of those same traders lost a substantial sum of those paper profits, as they had no suitable exit strategy. Some even ended up riding those stocks all the way up, and then back down again.
At the same time, trend followers had safely banked their profits generated before the bubble burst, and were now either out of the market or were making even more money on the short side as the bear market took hold.
Roll forward to 2008 and then 2009, and the situation was turned on its head. Trend followers simply followed what their systems were telling them, and made huge profits on the short side, before changing horses in the spring of 2009 as the general market trend turned upwards.
The fact of the matter is, by simply following the trend, and having a sound trading system, you can make money when the markets are trending upwards OR downwards.
As I've mentioned on numerous ocassions, the most difficult markets for trend followers are where there is simply no trend to follow. But then, all you can do is to act when a trend signal is given, and wait and see if a meaningful trend develops.
This means that I will never get in a positions right at the top or bottom, but by the same token, I will make the big money when a significant trend occurs, as I have clearly defined rules for when to enter, and more importantly, when to exit a position.
Friday, January 20, 2012
Two unarguable facts
I don't care what anyone says about the market, the following statements cannot be argued against:
- A company may have faultless fundamentals (based on information in the public domain), but if you are holding a long position in a downtrend, you will be losing money;
- A company may have lousy fundamentals (based on information in the public domain), but if you are holding a short position in an uptrend, you will be losing money.
Tuesday, January 17, 2012
Example long-term trade
Below is a chart of Dialight, which has seen a significant appreciation in its share price since Spring 2009. This is a great example of how a simple, solid long term trend following system can work to generate spectacular results.
Monday, January 16, 2012
Some fallen stars...
The vast majority of investors operate solely on the long side of the market, looking for good growth stocks, with promising fundamentals. After a while though, those stocks plateau before drifting downwards, or alternatively there is a sharp plunge when the company announce a sea change in the fundamental picture (think Enron). Just looking through a number of charts and there have been quite a number of stocks that shot up massively during the last year or two in percentage terms, only to have fallen right back down to earth.
Just three of those one time big winners in the UK, with the signals indicated by my longer term system:
Pursuit Dynamics - buy at 74p, exit at 407p - currently at 95.5p;
Beowulf Mining - buy at 3.2p, exit at 44.5p - currently at 10.4p;
Arian Silver - buy at 8.2p, exit at 37.5p - currently at 15.4p.
I can also think of plenty of US stocks that I have traded myself in the past that have done this, only to fall dramatically - just look at charts of stocks such as First Solar, DryShips, and James River Coal back in 2007 - 2009 to name just three.
Other stocks that are no longer with us, such as Southern Cross Healthcare and SMC Group also exhibited the same characteristics.
There are other stocks such as Google, Apple, Baidu and the like where a sound trend following method would have allowed you to capture significant chunks of the upwards move in price, and neatly sidestep the sharp downtrend in late 2008/early 2009.
Of course, if you have the ability to go short (perhaps trading via spreadbetting or CFD's) you can also profit from the often violent downtrends. One only has to think of Northern Rock and RBS (or pretty much any bank) as examples in 2008, together with countless others.
Investors are often wary of playing the short side of the market, because of the possibility of a sharp reversal, and the fear of having unlimited risk. The fact is, stocks do not always go up. As I've said before, even the strongest stocks fundamentally are likely to get hit in a bear market. Quite often, you can make more money in a shorter period of time if there is a pronounced downtrend in the general market, such as 2008, or the end of the dot com boom in the US. If you are a UK resident, trading via spreadbetting on a platform such as IG Index (who offer guaranteed stops on the majority of stocks) means you can profit from the down times while being able to fully quantify your maximum risk at any time. And spreadbetting carries the added bonus that, under current UK legislation, any profits made are exempt from Capital Gains Tax.
There are always stocks exhibiting these types of moves - as I have said before, the trick for investors is to have a clear plan as to when to sell, and maybe even looking at trading the short side. The thing is, no one knows when the music will stop and the party will end. You need to ensure that you avoid being caught in a downtrend wondering when to sell, or whether to hang on.
Think of it as going to visit the hallowed area called 'Profits' on the top floor of a building. You get in the escalator at the bottom. The escalator travels slowly upwards, until you reach your destination. The bell rings to signify you've reached your exit point, and you get out - it would be a bit silly not to. It is exactly the same in trading and investing - you need to get out when you get a signal. You've been patient on the way up - make sure you've got out before the escalator starts going down again.
Utilising a sound trend following method such as described in my e-book or which is discussed in the members area gives you the best opportunity to maximise your profits in these stocks in either direction, giving the share price space to wiggle around and ensure you are not kicked out on a minor reaction, but not too much so that you lose the vast majority of your profits.
To learn more about spreadbetting with IG Index, click here.
Just three of those one time big winners in the UK, with the signals indicated by my longer term system:
Pursuit Dynamics - buy at 74p, exit at 407p - currently at 95.5p;
Beowulf Mining - buy at 3.2p, exit at 44.5p - currently at 10.4p;
Arian Silver - buy at 8.2p, exit at 37.5p - currently at 15.4p.
I can also think of plenty of US stocks that I have traded myself in the past that have done this, only to fall dramatically - just look at charts of stocks such as First Solar, DryShips, and James River Coal back in 2007 - 2009 to name just three.
Other stocks that are no longer with us, such as Southern Cross Healthcare and SMC Group also exhibited the same characteristics.
There are other stocks such as Google, Apple, Baidu and the like where a sound trend following method would have allowed you to capture significant chunks of the upwards move in price, and neatly sidestep the sharp downtrend in late 2008/early 2009.
Of course, if you have the ability to go short (perhaps trading via spreadbetting or CFD's) you can also profit from the often violent downtrends. One only has to think of Northern Rock and RBS (or pretty much any bank) as examples in 2008, together with countless others.
Investors are often wary of playing the short side of the market, because of the possibility of a sharp reversal, and the fear of having unlimited risk. The fact is, stocks do not always go up. As I've said before, even the strongest stocks fundamentally are likely to get hit in a bear market. Quite often, you can make more money in a shorter period of time if there is a pronounced downtrend in the general market, such as 2008, or the end of the dot com boom in the US. If you are a UK resident, trading via spreadbetting on a platform such as IG Index (who offer guaranteed stops on the majority of stocks) means you can profit from the down times while being able to fully quantify your maximum risk at any time. And spreadbetting carries the added bonus that, under current UK legislation, any profits made are exempt from Capital Gains Tax.
There are always stocks exhibiting these types of moves - as I have said before, the trick for investors is to have a clear plan as to when to sell, and maybe even looking at trading the short side. The thing is, no one knows when the music will stop and the party will end. You need to ensure that you avoid being caught in a downtrend wondering when to sell, or whether to hang on.
Think of it as going to visit the hallowed area called 'Profits' on the top floor of a building. You get in the escalator at the bottom. The escalator travels slowly upwards, until you reach your destination. The bell rings to signify you've reached your exit point, and you get out - it would be a bit silly not to. It is exactly the same in trading and investing - you need to get out when you get a signal. You've been patient on the way up - make sure you've got out before the escalator starts going down again.
Utilising a sound trend following method such as described in my e-book or which is discussed in the members area gives you the best opportunity to maximise your profits in these stocks in either direction, giving the share price space to wiggle around and ensure you are not kicked out on a minor reaction, but not too much so that you lose the vast majority of your profits.
To learn more about spreadbetting with IG Index, click here.
Friday, January 13, 2012
Tesco
The big news yesterday was the sharp drop in the share price in Tesco, the UK's biggest retailer, following their disappointing trading update. Just out of interest, if you had been trading this stock, my system gave an exit signal the day prior to the news release. The previous buy signal was also highly dubious, as the price immediately reversed after hitting a new high, and if you have read and understood the system as described in my e-book, you should not have taken the trade anyway.
As for the new longer term system, this actually gave a short signal in mid July last year, and was still in the trade despite meandering in the intervening period.
As for the new longer term system, this actually gave a short signal in mid July last year, and was still in the trade despite meandering in the intervening period.
A longer term trend following system for traders and investors
New for 2012 is a longer term trend following system, which I shall be trading to compliment my existing system. This aims to eradicate some of the whipsawing around when there are short term oscillations on the general market. The system will assist those who prefer to trade longer-term, as well as investors who use the more traditional investment type strategies.
The main benefit to investors, who tend to focus more on fundametal analysis, will be that the timing of the entry signals will coincide with a new trend forming based on the price action, as well as ensuring they get an appropriate exit signal when the trend has ended.
The system structure is the same as the original system, but the parameters used and timeframe have been changed. I will be maintaining a model portfolio and will be calling my trades in real time within the members chatroom.
The system rules are detailed in the members area - to join, click here.
The main benefit to investors, who tend to focus more on fundametal analysis, will be that the timing of the entry signals will coincide with a new trend forming based on the price action, as well as ensuring they get an appropriate exit signal when the trend has ended.
The system structure is the same as the original system, but the parameters used and timeframe have been changed. I will be maintaining a model portfolio and will be calling my trades in real time within the members chatroom.
The system rules are detailed in the members area - to join, click here.
Tuesday, January 10, 2012
Fundamentals, Investing and Trend Following
The vast majority of investors and longer-term traders use some form of fundamental analysis when selecting stocks to invest in. This is all well and good, but what triggers a buy or sell in their investments?
The usual story is that, once they believe that a particular company has good prospects and the fundamentals look promising, they will start to buy, with the intention of holding their positions until such point that the fundamental story changes. The trick is to realise when there is a danger of overstaying their welcome, and to exit their positions before losing the bulk of their profits. This is where a trend following system, geared towards longer term trading and investing, can be invaluable.
Although longer term investing can be profitable even when there are adverse general market conditions, it should be remembered that, in a sharp downtrend in the markets, even the strongest and best stocks fundamentally will suffer, as was seen in late 2008. Of course, when a downtrend like that starts, it is not known whether the affected stocks will rebound at least back to its former highs, or will even continue further downwards.
In the past, I have suffered abuse from the 'fundamentalists' on a bulletin board when my own trading system signalled the end of an uptrend in a particular stock, and therefore I exited my position with a nice profit. However, those who solely used their fundamental analysis accused me of de-ramping the stock (as if I could influence the markets!!!) and rubbished my own analysis. The stock in question was just below 50p at the time, having peaked at 60p a couple of weeks prior.
The investors I left behind continued to champion this particular stock, and some of the posters on the bulletin board in question 'loaded up' their position to almost absurd levels, so confident were they that soon they would be holding significant profits.
As of last week, that particular stock was at the 15p level, with a lot of investors now holding massive losses after 'buying on a pullback' which was actually a new trend - downwards. Some of those still holding shares are even blaming the directors for the lack of recent positive news flow from the company for their losses!
Now, this may be an extreme example, but you only have to think about stocks such as Enron to know that people who were once sitting on huge profits in some of their investments managed to ride the share price all the way down, losing all of their hard earned profits. Enron fell from around $100 to 50c, with the true fundamental picture becoming apparent late in the day. You can also think of those who made (and lost) fortunes in the dot com bubble when prices collapsed there too. In these cases, it was not only individual investors, but hedge fund managers who also commited the same crime of not exiting their positions when the trend reversed - greed took over and they decided to load up even more.
Those of you who have read about Nicolas Darvas will know that he used a basic system marrying fundamental and technical analysis back in the early 1960's and did very well.
No system is perfect, and my intention is not to poke fun at those who have lost money by holding on too long - far from it. Everyone invests or trades to make money, however there is always someone on the other side of a winning trade, who loses money. Sometimes it is me, sometimes it is those who follow the company 'story'. Either way, if you are able to combine the two in your longer term holdings, I would be amazed if your overall returns did not improve.
The usual story is that, once they believe that a particular company has good prospects and the fundamentals look promising, they will start to buy, with the intention of holding their positions until such point that the fundamental story changes. The trick is to realise when there is a danger of overstaying their welcome, and to exit their positions before losing the bulk of their profits. This is where a trend following system, geared towards longer term trading and investing, can be invaluable.
Although longer term investing can be profitable even when there are adverse general market conditions, it should be remembered that, in a sharp downtrend in the markets, even the strongest and best stocks fundamentally will suffer, as was seen in late 2008. Of course, when a downtrend like that starts, it is not known whether the affected stocks will rebound at least back to its former highs, or will even continue further downwards.
In the past, I have suffered abuse from the 'fundamentalists' on a bulletin board when my own trading system signalled the end of an uptrend in a particular stock, and therefore I exited my position with a nice profit. However, those who solely used their fundamental analysis accused me of de-ramping the stock (as if I could influence the markets!!!) and rubbished my own analysis. The stock in question was just below 50p at the time, having peaked at 60p a couple of weeks prior.
The investors I left behind continued to champion this particular stock, and some of the posters on the bulletin board in question 'loaded up' their position to almost absurd levels, so confident were they that soon they would be holding significant profits.
As of last week, that particular stock was at the 15p level, with a lot of investors now holding massive losses after 'buying on a pullback' which was actually a new trend - downwards. Some of those still holding shares are even blaming the directors for the lack of recent positive news flow from the company for their losses!
Now, this may be an extreme example, but you only have to think about stocks such as Enron to know that people who were once sitting on huge profits in some of their investments managed to ride the share price all the way down, losing all of their hard earned profits. Enron fell from around $100 to 50c, with the true fundamental picture becoming apparent late in the day. You can also think of those who made (and lost) fortunes in the dot com bubble when prices collapsed there too. In these cases, it was not only individual investors, but hedge fund managers who also commited the same crime of not exiting their positions when the trend reversed - greed took over and they decided to load up even more.
Those of you who have read about Nicolas Darvas will know that he used a basic system marrying fundamental and technical analysis back in the early 1960's and did very well.
No system is perfect, and my intention is not to poke fun at those who have lost money by holding on too long - far from it. Everyone invests or trades to make money, however there is always someone on the other side of a winning trade, who loses money. Sometimes it is me, sometimes it is those who follow the company 'story'. Either way, if you are able to combine the two in your longer term holdings, I would be amazed if your overall returns did not improve.
2011 - A tricky year for trend followers
2011 was a poor year for trend following in general. The combination of high volatility and a lack of direction in the markets combined to make it a year of failed breakouts and repeated bouts of frustration. This can be seen when looking at websites which track numerous different trend following models. Although the timing may differ slightly as a result of the entry and exit criteria in each system, trend following systems en masse tend to make (and lose) their money in the same markets at similar times. In conditions such as those in 2011, observing strict money management rules would have kept you in the game, and be in a position to profit from future trends, which will undoubtedly occur in the future.
A new year always brings new optimism, and hopefully this year will see some good trends develop that trend followers can profit from. As always, when trading systematically we have no bias as to trade on the long or short side, or whether any trends develop in spite (or because) of the perceived fundamantal backdrop or sentiment - we simply follow the signals that our system generates and act accordingly.
A new year always brings new optimism, and hopefully this year will see some good trends develop that trend followers can profit from. As always, when trading systematically we have no bias as to trade on the long or short side, or whether any trends develop in spite (or because) of the perceived fundamantal backdrop or sentiment - we simply follow the signals that our system generates and act accordingly.
New year - new look for the blog
With the advent of the New Year, the look of the blog will be updated in the coming days. The address of the blog will also be changing, although by using the existing link you will still get you to the blog.
Hopefully I will have more positive things to say about the market conditions for trend followers in the coming months, and I hope everyone has a prosperous 2012.
Hopefully I will have more positive things to say about the market conditions for trend followers in the coming months, and I hope everyone has a prosperous 2012.
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