THIRTY years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the last twentieth century.
At the beginning of 1988 this appears an outlandish prediction. Proposals for eventual monetary union proliferated five and ten years ago, but they hardly envisaged the setbacks of 1987. The governments of the big economies tried to move an inch or two towards a more managed system of exchange rates – a logical preliminary, it might seem, to radical monetary reform. For lack of co-operation in their underlying economic policies they bungled it horribly, and provoked the rise in interest rates that brought on the stock market crash of October. These events have chastened exchange-rate reformers. The market crash taught them that the pretence of policy co-operation can be worse than nothing, and that until real co-operation is feasible (i.e., until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.
What kind of person you are “outside the charts” will help determine what kind of trader you will be “inside the charts”.
If you are of the first kind, “the wills”, you will overcome all the obstacles on your way to consistent success. You will accept, even embrace, uncertainty as the driving force behind the next big opportunity for gain. You will lose gracefully and move on to the next trade, knowing that trading is a game of probabilities and possibilities; not certainties and absolutes. You will leave money on the table, thankful for what you were able to gain; not bitter by what was left. If you are of the first kind you will succeed. You will indeed.
If you are of the second kind, “the won’ts”, you will look for the always elusive easy road to riches. You won’t believe in the effort required to become a disciplined trader, driven by solid habits repeated daily. You won’t apply the skill necessary for managing risk as that would require planning and preparation, something you just do not have time for. You won’t develop your own well defined trading edge, depending instead upon others to do it for you. If you are of the second kind your opposition to anything other than what is easy will make it quite difficult to succeed when times get tough, and they will but you won’t.
If you are of the third kind, “the can’ts”, you will blame everyone and everything for your failures. You can’t succeed because you are too busy finding fault in any trading strategy that produces a loss. You can’t succeed because anyone who does so has some special knowledge or gift that you obviously cannot possess. You can’t succeed because the market is rigged. If you are of the third kind…quit. You are a quitter with a quitter’s attitude. Be in the majority. Be a can’t. It’s easy.
Trend following historically has a relatively low win percentage, across all asset classes. The positive expectancy from using such a system comes from the size of the winners far exceeding any losses incurred;
Trend followers never try to predict tops or bottoms in markets – they buy on strength and sell on weakness;
Strict risk managment and position size minimises the losses as far as possible when a losing streak hits;
Probably 80% of your trades each year will cancel each other out – consisting of small winners, small losers (restricted to 1R of your capital) and break-even trades;
The remaining 20% of your trades will probably account for 100% of your profits, but you never know which ones will generate the profits when you open the position;
To achieve this you HAVE to let the profits run until you receive an exit signal;
Stops are updated as often as your system rules determine;
And you have to adhere to your stops at all times;
Nobody knows when a trend will reverse, however when it does, you automatically give back a portion of your profits before your (trailing) stops are hit;
If a trend breakout reverses or fails just after entering a position, you will incur losses;
Significant increases in volatility can cause losses due to whipsawing or trading ‘noise’;
The best market conditions for trend followers are trending, stable markets;
The worst market conditions for trend followers are non-trending, volatile markets;
There are numerous trend following methods out there, but although the entry/exit parameters may vary, trend followers as a rule will make (or lose) money in the same markets at the same times;
If you don’t understand any of the above points, or are not prepared to accept these facts, then you do not have the mindset to follow a trend following method.
Investments help to build wealth, which is necessary to fight against any financial adversity that the investors or their heirs may face in the future. Some people can manage to save small amounts regularly, whereas others may have substantial amounts on their hands, which, if not invested promptly in the right type of investment, can disappear in no time. Therefore it is really important to know how to invest and in what to invest, so as to manage risks well, while increasing the possibility of making good returns over the years.
Traditional forms of investments and collectibles
In general, people tend to consider investments in stocks, bonds, tax saving opportunities, retirement funds, gold, silver, and mutual funds. But there are many other categories of investments that one can opt for besides these traditional types of investments. One which is getting increasingly popular is investment in real estate and properties. Investments in stocks are favored a great deal too because people can invest even relatively small amounts of money in stocks. This helps to increase wealth at a faster rate than investments in traditional options, such as those in gold or silver. But there are inherent risks as well. While there are ways to logically assess the value of stocks, the market sentiment plays a big role and so do international conditions. Both these issues and any various other underlying matters cannot be easily gauged.
There are then interesting forms of investments which tend to be bypassed or not appreciated enough for their possible value. These include investments in art works, antiques, historic newspapers, and original photographs of celebrities or leaders around whom history revolves. These types of investments can sometimes be even more risky, but often this is where the big money exists.
Investors in these objects are often referred to as collectors. Collectors would also be willing to pay for autographs of famous personalities like baseball players, or soccer players. Returns from such forms of investment can be stupendous. But losses from this category of investment can be substantial too. An investor could well pay a substantial amount for an antique piece, but have no taker for it, at the right time, when he needs to cash the investment. This will often force him or her to sell the investment at a throwaway price. Another problem with these types of investments is that there are bound to be a lot of replicas or forged versions, making it really difficult to buy an authentic piece or to make interested buyers understand that the price you are asking is considerably higher because yours is indeed an original.
You don’t have a crystal ball, and therefore accept you cannot predict a non-existent future. All you can do is can place your bets, control your risk, and then sit back and watch what happens.
Price can only do one of three things: go up, go down, or go sideways. Ultimately, it is only when price moves that a profit or loss is generated. Therefore, as a trend follower it makes sense to focus your attention on price.
Accept that you can only control the things you can control – namely when to enter or exit a trade, which markets to trade, how much equity to risk etc. All these elements should be part of your trading plan. Your entry parameters should be designed to identify when a trend may start developing, and your exit parameters when a trend has finished.
Equally, accept that once you are in a trade you are no longer in control. You cannot control the market – to make money you have to let the trades play themselves out.
Acknowledge that you can lose money even when all your criteria are met. You need to accept that you are playing an odds game, and there are no “can’t lose” trades out there.
Being very conservative in the amount of equity you risk on each position means that you can have an emotional indifference towards each individual profit or loss generated.
You MUST take full responsibility for your trading decisions, and adherence to your system rules.
If things go against you do not blame anyone else, or any other external factor. You make all your trading decisions off your own back.
Accept that luck (good or bad) may play a part on any one individual trade, however over the long run luck plays no part in your success or failure.
Using a system with positive expectancy, allied to good risk control, and having control over your emotions will mean that, in the long term you will make money. However, there is a complete randomness about which trade will produce a profit or a loss. All you do is look for a set up which matches your own criteria, and then open the trade once the desired entry price level is reached.
Once in a trade, your only concern is controlling your open risk, by cutting losses aggressively, By the same token, you need to let profits run. Providing the trend is still intact, then you should remain in the trade. Correct placing of your stops will keep the trade open until that happens.
If done properly, trend following can take up very little of your normal day. Other than placing orders to open new trades, or to update stops on existing positions, there is very little to do in market hours. The process of identifying potential new setups can be done when the markets are closed, in the evening or at weekends.
You only ever get taken out of a trade when price breaches your stop level. Do not close a position simply because price has moved a reasonable amount in your favour. Do not fear an open profit evaporating.
Once a trade is closed, review the trade. Did you enter when you should have done? Was your initial stop correctly placed, and consequently were your position size and equity risk correct as per your trading plan? Was the trailing stop placed properly? If you can answer yes to all these questions, then it was a good trade, irrespective of whether you ended up with a profit or a loss.
You know that, if you have a high level of trading efficiency, then it proves you are able to follow your trading rules, both emotionally and operationally. If the system you are using is proven to have a positive expectancy, then you will make money.
I like to collect quotes from books I read, and here you have some good quotes from the book:
…we were taught how to think in terms of the long run whan trading and we were given a system with an edge. (page 34)
The Turtle Way views losses in the same manner: they are the cost of doing business rather than an indication of a trading error or a bad decision. ……In fact, we were taught that periods of losses usually precede periods of good trading (page 37)
The secret of trading and of the Turtles’ success is that you can trade successfully by using ideas and concepts that are well known and have been around for years. But you have to follow those rules consistently (page 39)
Over the years I kept finding evidence that emotional and psychological strength are the most important ingredients in successful trading. This was my first exposure to that idea and the first time I had seen it in action (page 44).
Good trading is not about being right, it’s about trading right. If you want to be successful, you need to think of the long run and ignore the outcomes of individual trades (page 44).
….It takes a lot of time and study before one realizes just how simple trading is, but it takes many years of failure before most traders come to grips with how hard it can be to keep things simple and not lose sight of the basics (page 115).
Keep it simple. Simple time tested methods that are well executed will beat fancy complicated methods every time (page 131).
In a similar manner, simple rules make systems more robust because those rules work in a greater variety of circumstances (page 212).
People have a tendency to believe that complicated ideas are better than simple ones….Some of us thought that trading successfully couldn’t possibly be that simple; that there must be something else to it (page 224).
The primary goal of trading should be to stay in the game (page 116).
Luck or random effects play a large role in the performance of actual traders and actual funds even though the best traders do not like to admit that to their investors (page 159).
They often do not realize how markets go through phases and change over time, often returning to conditions that previously existed….In trading as in life, the young often fail to see the value in studying the history that occurred before they existed (page 193).
The reality is that you don’t know and can’t predict how a system will perform. The best you can do is use tools that provide a sense of the range of potential values and the factors that affect those values (page 196).
There are many successful discretionary traders, but there are far more unsuccessful ones. The biggest reason for this is that the ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits (page 224).
One of the ways in which good traders differ from those who are less successful is that they are not afraid to be different (page 235).
Nothing ventured, nothing gained. Risk is your friend (page 236).
Most successful traders use a mechanical trading system…..It makes it easier for a trader to trade consistently because there is a set of rules that specifically define exactly what should be done (page 245).