The ebbs and flows of open profits

As mentioned in previous posts, I am more concerned with tracking my cash equity rather than open equity (i.e including profits on existing positions) when reviewing my own trading performance. The main reason for doing this is that, when trend following, you allow each a position a certain amount of 'wiggle room' or volatility that will keep you in a position, reducing the possibility of needlessly being stopped out.

Profitable trends can also take weeks or even months to develop, whereas any losing position can be closed within 24 hours of being initiated. Therefore I look at my cash equity curve as being the worst case scenario for me. 

Short of suffering a gap down through a pre-determined stop level, I know what my total risk is, both individually or cumulatively, on any given day. I also calculate my position size as a percentage of cash equity. I do not want to factor in a bunch of open profits to this calculation, which may disappear when a trend reverses.

Today has been a good example of why I do this - the UK and European markets opened down this morning, and I was confronted with a sea of red when reviewing my existing long positions. Until I get an exit signal, then any fluctuations are considered to be within the context of the prevailing trend - as far as I'm concerned, this sort of movement is all noise. And, as these movements can move for or against me, I see no point in worrying about it. All I concentrate is updating my stops as per the system rules, and letting the trades play themselves out.

Being able to succeed when trend following means that you have to accept this. If you can't then this suggests that either:

• you haven't yet developed the necessary mindset or psychological skills to follow trends in a systematic manner;
• your position sizes are too large relative to your equity.

One thing that can help you with the mindset is to try and divorce yourself from the monetary aspect. Think in terms of focusing your energies on following the process, not the outcome. Think in terms of risks and rewards, and gauging your profitability in terms of R.