Beliefs and simplicity

A trader friend recently told me about a commercial property transaction he was asked to get involved with some years ago. The deal was worth several million pounds, and given the complexity of the deal you would have expected that the people involved concerned would have wanted a detailed reports from the banks or property agents, surveyors, and the local councils, running into many pages, covering all aspects of the potential deal being suggested.

As it was, his PA advised he would not consider the proposal unless it fitted on a single side of A4 paper. "Please send it over to him, and I will warn you he will not turn the page over". My trader friend explained to me that this individual was a multi-millionaire, self-made successful businessman who preached the virtues of simplicity and clarified thinking wherever possible, focusing on the big picture and the main details.

Hearing this story was music to my ears, as in my own trading I have always embraced the KISS (Keep it simple, stupid!) methodology. A while back, fellow trader Jon Boorman sent out a tweet asking if traders could summarise their basic approach to the markets in ten words or less. Responding to this essentially gave me my tag line at the top of this blog:

• Cut losses;
• Run profits;
• Manage risk;
• Don't predict;
• Follow price and its trends (I simply added the last three words afterwards to emphasise a basic belief of mine).

I believe that you should be able to condense your basic thoughts or beliefs into a brief, bullet point style summary. Yes, there may well be a more detailed, technical explanation lurking behind each of those points, but that summary should give the layman a good idea of what you do.

Most trend followers have the same ideas and beliefs, and this follows through into their own detailed trading rules - in most cases, they could be written down on the back of the proverbial cigarette packet.

Of course, there are plenty of traders out there who cannot accept you can be successful trading with such a simplistic approach. On more than one occasion, I have attempted to explain my own approach in detail to someone who is keen to learn, and they cannot believe that is what I do. "What about X, or Y, or Z?" they ask. They say you cannot trade like that. Well sorry, there have been plenty of traders over the decades who have used a similar approach successfully.

Sometimes, I get asked about the following:

Fundamentals?

See Enron, Global Crossing, Tesco (and now Toshiba) etc. - 'nuff said.

Volume?

If price breaks out on say only 50% of its normal volume, does that mean I only get 50% of the profits? Perhaps more importantly, if price moves against me only 50% of its normal volume, do I only get to suffer 50% of the loss?

Overbought/oversold indicators?

When a market gets into a strong trend, then it can stay overbought/oversold for a long time. Quite often, when a new trend starts, it will already be registering an overbought or oversold condition.

Price targets?

For a trend follower, there are no price targets (although sometimes you may hear a trend follower state that, on a long trade, price the target is the moon, and on a short trade, the target is zero!). The markets, all its participants and their own buying and selling will determine how far a price move travels.

Those answers outline some of my own basic beliefs about what isn't important for me to make money as a trend follower. If there is something I think which adds to my performance, then it is will form part of my beliefs and consequently there will be a rule relating to it. By the same token, if my own beliefs indicate that something is not important, then it won't be reflected within my own trading rules.

Similar to the multi-millionaire mentioned above, and also harking back to my KISS principles, everything else is pure fluff, and doesn't form part of my own trading approach. Why should I clutter up my mind?

Now, some of my own beliefs may be the polar opposite to your own. That's fine. If they help make you money, then you should factor them into your own approach. All I know is, I know what works for me, and you should know what works for you. That's the key.

To finish, I will say that all my own beliefs come back to these basic facts about trading:

• If you go long on a trade, the only way you can make a profit is if price moves up after you have entered, and your trailing stop methodology allows you to exit above your entry price;
• If you go short on a trade, the only way you can make a profit is if price moves down after you have entered, and your trailing stop methodology allows you to exit below your entry price.

Following price and its movements allow me to follow those basic facts, and cut out all the fluff - no fundamentals, no broker recommendations, no listening to other peoples opinions or beliefs.

To be successful therefore, means following the basic points in the ten word summary. KISS indeed!