Category Archives: Trend Following

How to have Peace of Mind when trading?

As a trend follower, we don’t generate trends nor we predict trends. We merely follow trends. However it is a waiting game and it takes lots of patience and time.

You first plan your trades which include the point at which you enter the market and the point at which you exit from the market. After you enter, the market may go against you and you see your floating loss becoming bigger and bigger. Or it may start to trend and you see your floating profit go up and up. At this point, what would you do? If you are making losses, would you be worried and keep watching the charts with a fear that the drawdown would get bigger and bigger? Would you close your trade or would you hold on to your trades and pray that the market will go in your favour soon? If the market start to trend, would you close the trades prematurely with a fear that your profits will be gone if you leave it open?

This is a characteristic of most traders. Fear and greed make them cut their profits and let their losses run. To be a successful trend trader, you have to plan your trades and trade according to your plan. You should instead cut your losses and let your profits run. Obviously it is easier said than done. Therefore the focus of a good trader, whether a trend trader or a day trader, should be on the mindset when trading rather than on the technical aspects.

How do you maintain peace of mind when you suffer a temporary drawdown when trading?

Don’t predict your returns. When you don’t predict, you have zero expectations. When you have zero expectations, you have no emotions and when you have no emotions you will have peace of mind.

Just leave it to the market to dictate the trends and your Return on Investments (ROI) and take whatever that comes along.

Quotes by Great Trend Traders

Quotes by some of the greatest trend traders, which are relevant to the way trend followers trade. 

“When you have a position, you put it on for a reason, and you’ve got to keep it until the reason no longer exists. Don’t take profits just for the sake of taking profits, you have to have a strategy, know how it works and follow through on it.”

~Richard Dennis, mentor of the turtle traders

 

“I never predict price movements, i just follow them”

Richard Donchian, the Father of Trend Following

 

“We know that we know almost nothing. but the “almost nothing” we know isn’t completely nothing, and we only bet on that.”

~David Harding, founder of Winton Capital

 

“We don’t make market predictions. We just ride the bucking bronco.”

~Bill Dunn, founder of Dunn Capital Management Inc

 

“Trend following isn’t supposed to be fun, it’s supposed to be about winning profits!”

“I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it’s that simple.”

~John W. Henry, founder of John W. Henry & Company, Inc

 

“The market is never wrong”

~Jerry Parker, founder of Chesapeake Capital Management

 

“Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.”

“If you diversify, control your risk, and go with the trend, it just has to work.”

“I don’t trade for excitement; I trade to win.”

~Larry Hite, founder of Hite Capital LLC

The Story of Richard Dennis and the Turtles

Richard J. Dennis, a commodities speculator once known as the “Prince of the Pit’, was born in Chicago, in January, 1949. In the early 1970s, he borrowed $1,600 and reportedly made $200 million in about ten years

In contrast to the vast majority of floor traders, who quickly scalped trades throughout a trading day, Dennis held positions for longer periods—riding out short-term fluctuations and holding over the intermediate term.

Dennis believed that successful trading could be taught, he made a bet with his friend and fellow trader, William Eckhardt and ran a classified ad in the Wall Street Journal looking for novices to train. Dennis recruited and trained 21 men and 2 women, in two groups, one from December 1983, and the other from December 1984. His recruits had anything but traditional Wall Street background, they included a professional blackjack player, a pianist, and a fantasy game designer.

Dennis trained this group, known as Turtles, for only two weeks about a simple trend-following system, trading a range of commodities, currencies, and bond markets, buying when prices increased above their recent range, and selling when they fell below their recent range. They were taught to cut position size during losing periods and to pyramid aggressively—up to a third or a half of total exposure, although only 24% of total capital would be exposed at any one time. This type of trading system will generate losses in periods when the market is rangebound, often for months at a time, and profits during large market moves.

In January of 1984, after the two-week training period was ended, Dennis gave each of the Turtles a trading account and had them trade the systems they had been taught . During this one-month trading period, they were allowed to trade a maximum of 12 contracts per market. After the trial-period ended, he gave the few of them who had successfully traded the system during the one-month trial, accounts ranging from $250,000 to $2 million of his own money to manage.

When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million

Some of the turtles are still trading today and managing respectable funds, eg :
Jerry Parker – the most successful turtle, founded Chesapeake Capital Corporation
Elizabeth Cheval – runs her trading firm EMC Capital

Why were they called Turtles? It was simply a nickname that Dennis had given his students when he said to his class “We are going to grow traders just like they grow turtles in Singapore” (after he had came back from visiting a Singapore turtle farm).

What is Trend Following?

Investopedia.com definition of trend trading is it is a trading strategy that attempts to capture gains through the analysis of an asset’s momentum in a particular direction. The trend trader enters into a long position when a stock is trending upward (successively higher highs). Conversely, a short position is taken when the stock is in a down trend (successively lower highs). Regardless of their chosen time frame, traders will remain in their position until they believe the trend has reversed.

Characteristics of the trend followers :

The trend traders use different techniques and calculations to determine the general direction of the market to generate a trade signal

Once they identify the general direction, they simply jump on the trend and ride it. They do not aim to forecast or predict specific price levels, instead they rely on their calculations to determine a reversal and thus the exit point

Trend followers take what the market offers in the moment, they don’t predict the future

Money management is very important to the trend follower due to the long term view of the trades