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Trading Advice to My Younger Self

younger trading selfA great quote by Martin Luther King Jr states:

‘Knowledge is a process of piling up facts; wisdom lies in their simplification’

I’m a big believer in simplification when it comes to trading. And I don’t mean being lazy and not constantly researching, learning, testing and refining processes.

In many ways trading is a hugely complex and noisy business. The markets are flooded with so much varying opinion and conflicting market analysis. To the extent that sometimes I wonder if anyone really knows what they are talking about. And if they do, are they able to apply their knowledge towards developing a successful trading strategy. One that is consistently able to extract profits from a beast that to many represents nothing more than chaos in motion.

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Are Two Triggers Better Than One?

foundation triggersA trigger is the reason a trade is made. If x happens, then buy. If y happens, then sell.

I was reading an archived article from a popular trading magazine last week. It suggested that combining two triggers increased the success of a trade, i.e. if x & y happen, then buy. The article was opinion only; there was no evidence that combining triggers gave a better outcome.

So let's put it to the test...

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Trend Following on a Weekly Time Frame

Cover unholy grailsOne of the most popular systems I wrote about in my 2012 book, Unholy Grails, was the Bollinger Band Breakout strategy.

That version used daily bars, but a common question I got was, "How does it perform on weekly data?"

Back then I coded up a weekly version to appease readers, so let's revisit to see how it's stood up over the last 7-years. We'll call it the Weekly BBO.

In layman's terms the rules are:

When the broader market is in an uptrend, look to buy any stock that breaches the upper side of its Bollinger Band. Place an initial stop 20% below and continue to trail that stop 20% behind as price moves higher. However, if the broader market trend turns down, then tighten that trailing stop to 10%. We will also exit if the stock closes below its lower Bollinger Band.

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Have you been doing the maths?

Have you been doing the mathsNew traders rarely focus on maths.

And if they do, it tends to be primarily a focus on the winning percentage of their trades. In fact, if you tell your friends you are a trader, one of the first questions they ask is “What is your winning percentage?”

And if you answered 70 - 80% you’d likely get a fair number of approving nods and pats on the back. Yet if your losses were huge compared to your wins, you could actually be losing money with an 80% win rate.

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Combining Strategies For Comfort

Combining Strategies For ComfortBefore I get into today's article I need to respond to some comments received after last week's Mean Reversion article. One criticism was the system was losing its edge as the equity curve had been flattening over the last few years.

This most likely came about as I used a log scale chart. So for better clarity, here is the linear scale chart.

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