Truths fact about trend following
- You will have lots of small losses, a few small gains, and a few big winners if traded trend following properly.
- You will have to accept that your opinion or beliefs about what might or might not happen count for nothing.
- Often, a new trend will start seemingly for no obvious reason.
- Trends have a tendency to persist.
- You do not need to understand the fundamentals behind a stock, However, you do need to have a method of determining whether price is trending or not
- In strong trending phases, indicators can persistently stay overbought or oversold for several weeks to months.
- A major trending phase usually begins when traders pronounce that trend following is dead.
- Being able to effectively follow price trends means you need to have the ability to follow a simple set of rules about when to enter, when to exit, when to average up, and how to position size your trade.
- 90% of new traders quit trend following when they were very frustrated by a string of losses.
- You need to accept that individual markets can move from from trending to non-trending phases (or vice versa) at any moment.
- Price will move in a particular direction much further than anyone can believe.
- Once in a profitable trade, there is only one price level you need to concentrate on – your trailing stop. Everything else is noise.
- Your stop methodology should be able to identify when a trend has finished.
- Trading with the trend is conceptually very easy to understand, but psychologically very difficult to master.
- Patience and discipline are key components of a successful trend followers.
- Trend following practice the principle of cutting losses short, and letting winners run.
- Trend following is boring, you could go through significant periods of time without any entry signals being given.
- Most profitable periods for trend followers are when they do absolutely nothing, other than let existing trades play themselves out
“Markets aren’t chaotic, just as the seasons follow a series of predictable trends, so does price action. Stocks are like everything else in the world: They move in trends, and trends tend to persist.”
– Jonathan Hoenig
Portfolio Manager,
Capitalistpig Hedge Fund LLC