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I’m not a stock picker.

money blogI’m not a stock picker. To give you an idea, over the last six or seven years my major trend following strategy here in Australia that trades long only equities, my win rate is about 49.6%. During that time, my compounded annualized return is about 18% compared to the market 2.7%. That’s only getting it right 50% of the time.

I don’t pick stocks, they pick me. Because they float to the top. I don’t have to pick the next best sector. I don’t have to time when the market is going to be good or when it’s going to be bad. I just have to be there when the time comes along. I think that’s a very good lesson, especially when you’re trading equities, especially on the long side. You can’t afford not to be involved during the good times.

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How to Trade Profitably

How to trade profitablyA few years ago I went around Australia and did a seminar showing people how to manage their risk appropriately. The videos for this seminar are now available to Members in The Chartist Community (titled the Profitable Trader). I suggest that the 2% rule is probably not appropriate for everybody. You know the 2% rule; you risk no more than 2% of your capital on any one trade. But, if you have a strategy that has a win rate of 50% then mathematics at some stage you will have sixteen loses in a row. If you’re risking 2% per trade, and have sixteen loses in a row then your drawdown is going to be somewhere around 30% at some stage. If you can only handle a maximum drawdown of 10% then you should not be trading using 2%.

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Learning how to Trade the Stock Market

Learning how to trade the stock marketIf we use an analogy; I was teaching my daughter how to drive. I use to have hair before I was teaching her how to drive. Now I have none. When you teach a teenager how to drive, the quantitative rules are pretty straight forward. Put your foot on the accelerator to move the car forward. Turn the wheel to the left to go left. Turn the wheel to the right to go right. Put your foot on the break to stop. They’re rules that can be repeated.

In trading we have the same kind of things. You have an entry mechanism, a stop loss, fixed fractional position sizing, an exit mechanism etc.. They are rules that can be taught and repeated into the future.

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Trading the Trends in the Stock Market

Hitchhiker_chartTrends can’t not exist. The economy is always shifting back or forth, and human sentiment which is ultimately the driver of the market, is always shifting backwards and forwards –and therefore trends will always occur.

I had a run in with a very major Australian educator whom in 2009 came out and basically said in “Whatever strategy you’ve used for the last twenty years, will not work ever again.” And I took that to heart. I thought that was an absolute lie, Of course he had the answer right? He had the new paradigm that you had to use now, that hasn’t worked for the last twenty years. So his point was mainly to scare people and to sell something different. Maybe his strategy didn’t work anymore, and maybe it wasn’t robust enough to facilitate the current market. You can’t tell me that markets are going to stop trending. They just can’t stop trending.

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Trend Following System

Trend following systemsA trend following system has got rules.

Simple does work. It really does work. People tend to look for complexity.

People tend go for a strategy that has a higher winning percentage. But that’s wrong. Simplicity works best because simplicity is robust and it works exceptionally well. In my book ‘Unholy Grails’, towards the end I disclose a strategy called the 20% flipper. It’s remarkably simple.

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