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Why Trend Following Works

Why Trend Following WorksThere is a wonderful quote by the great Jesse Livermore that I really like:

‘I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans, and human nature never changes.’

Two of the strongest emotions aligned to human nature are FEAR and GREED.

Fear is the most powerful. As reflected on price charts when uptrends reverse.

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Don't Break Your Promises

Dont Break Your Promises Ok, so you’ve made the big decision one day that you want to become a trader. You’ve saved enough capital to make it a worthwhile venture. You’ve done a few courses. You’ve read a few books. You’re at the stage where you understand the importance of having a strategy and a Trading Plan.

At the end of the day you are as ready as anyone starting a new profession and entering into the unknown. Nothing will ever equip you initially on what trading is really all about of course, yet you’ll find out soon enough.

So this brings me to a very important point. One that is often overlooked when it comes to trading. And all the moving parts and noise that goes with it.

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When Less Equates to More

When Less Equates to MoreAs a novice trader, I studied every theory under the sun. And used every technical indicator. I introduced as much noise into my strategies thinking that more was best.
Surely everything combined would ensure all bases were covered? It was a ridiculous assumption.

It was some years on before I realised that reducing the number of trading decisions was the direction I should have been heading.

The next decision was what to take out of the quagmire of strategies to relieve me of the distracting noise, contradictions and confusion.

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Trading in the Now

trading in the nowLao-Tzu was an ancient Chinese philosopher and writer who coined the following phrase:

If you are depressed you are living in the past.
If you are anxious you are living in the future.
If you are at peace you are living in the present’

In relation to trading, living in the past may relate to a bad trade you made. Maybe you risked too much and took a heavy loss. Or perhaps you made an impulse trade centred on FOMO which ended badly.

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The Art of Risk Management

reading booksI’ve read many books about successful traders. ‘Market Wizards’ by Jack D Schwager is an obvious one. If you haven’t read it I’d suggest you get your hands on a copy.

One of the key lessons coming from many of the traders interviewed in the book, was to never risk more than 1% of your trading capital on any one trade.

New traders may misinterpret this as only being able to trade with 1% of your trading capital. Yet what it actually means is adjusting your stops and position sizing appropriately, so that your greatest loss is only 1%.

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