The Trend Following Bible
Page 17
It's essential that you maintain a long-term perspective. That is why I commonly say trend following is a marathon. Too many traders and even investors in traders focus on short-term results and lose their perspective. I am asked all the time how I did last month or last year. The reality is, that is meaningless. If I had a great month or year, does that mean I will have a great month or year following? Probably not! I am at the mercy of the markets trending. If they do not trend, I will not make any money. They do not have to do anything. I like the analogy: If there are fish, I believe I stand a good chance to catch them. (If there are no fish . . . I'm probably going to eat pasta that day.)
After experiencing a loss or a bad week, too many traders give up and start looking for or start trading a different strategy. And while the trading strategy they just abandoned is recovering from the drawdown, the new trading strategy may result in yet more losses, so again, they start looking for another. It becomes a vicious cycle.
You need to be convinced that trend following is right for you. Truthfully, it might not be. It might too boring or too slow. You have to believe that over time you stand the potential to grind out profits. If you do not really believe or internalize this, you will quit at the first steep drawdown. I promise you . . . there is a drawdown out there that can stop anyone from trading.
The biggest single mistake beginning traders make is that they believe that trading is easy.
Successful trading has to be the hardest thing to achieve. My goal is to enlighten you and teach you what it took me decades to truly learn.
You will learn to have an exact plan with exact entries, exact exits with both profits and losses, and exact quantities to buy or sell. My goal is to teach you to manage the uncertainty and risks in the markets. We are dealing in the unknown and uncertainty; this is why trading is full of tremendous risks.
You will learn to take losses easily and quickly because you will know exactly where the trade does not work. You will learn that if you do not exit you will cause yourself tremendous financial and emotional damage.
You will learn that trend following is a marathon, that any trade or month really does not mean anything.
You will learn to trust your trading plan.
You will learn to take responsibility for all of your trades.
You will learn to be objective. You will not become emotionally attached to your trades.
You will learn that you do not need to be right all the time in order to make money! You need to have an exact plan as well as the discipline and patience to let it work over time.
Luckily for me, my mentors instilled in me that it was more important how to think than to find that elusive magical system or indicator. Richard Dennis and William Eckhardt from the Turtle legend also emphasized this when they taught their Turtle protégés.
In 1983 William Eckhardt and Richard Dennis made a bet that trading can be taught. The bet was lost by William Eckhardt. He believed that trading was a skill not easily taught. His colleague Richard Dennis differed and believed that trading could be taught. They called their students Turtles. Not all of the Turtles succeeded even though they were all taught exactly the same. Why did some of the Turtles succeed and continue till today compounding money? Simple answer, how they thought!
William Eckhardt and Richard Dennis raised a generation of trend followers. Today the offspring of those trend followers are making a mark for themselves. The entire training of the Turtle program was two weeks long. There was very little in the secret sauce learning. Most of the learning was how to think and how to deal with the psychology of trading. Sadly, this is the least interesting to most beginning traders but the most important.
■ Make It Second Nature
How to think like a successful trend follower hopefully will be ingrained in you.
One of my mentors learned under Ed Seykota and Van Tharp. He would constantly remind me of many of their statements and how to think. As well, one of my mentors is a big admirer of Mark Douglas, who is well known in the trading psychology field. Mark Douglas left a big impression on him and I was constantly reminded of many of Mark Douglas's thoughts in our countless conversations. Imagine 18 years of speaking to someone virtually every day, the correct trading mentality resonated.
There are the greed and fear aspects you will learn to overcome. When trading, these two emotions are constantly present: greed and fear. If your trade goes well, a possible natural inclination will be to trade even more, opening yourself up to significant loss. And if your trade goes wrong, fear will torture you. Fear of loss or fear of a further loss makes traders scared. Greed and fear are destructive emotions, and all traders are influenced by them; they're a natural part of every trader's psychology. Greed and fear can make traders act irrationally: they may know what they should do, but they simply can't do it. The bottom line: If you're scared or greedy, and you can't control your emotions when day trading, then you'll have a very difficult time being profitable.
You will learn it is not about being smart or trying to prove something to anyone. There will be no need to try to pick tops and bottoms. You will learn to accept the truth when the trade did not work and there is no need to hold on.
Do not allow yourself to get caught up in positive or negative emotions. Understand the psychology behind trading and not just know that no trade is guaranteed but also internalize the fact. Work on your mental state. If a trade goes wrong, try to work out why it did and learn from it. Executing a trading method with discipline is the only way to overcome destructive emotions. Whether you're a day trader or an investor, and whether you trade in commodities, stocks, or currencies, the fact is that your trading psychology WILL influence your results. If you miss a trade, another one will be just around the corner. Practice patience and discipline.
You need to control your emotions by having a specific plan to follow. Having the correct trading psychology is just as important as having a robust trading strategy.
The more you are prepared mentally for trading, the better you will trade.
You will learn to negate impulsive behavior in which you might buy or sell without following a plan or thinking that you need one. Impatience or boredom is another pillar of failure. There are those who are seeking action or simply adrenaline.
It all boils down to—Do you really want to succeed?
If you truly want to succeed—you need a well-thought-out plan and you need to follow it exactly!
I am giving you my plan that I use every day when I trade. You can use it exactly as I do or use pieces of it that match your personality.
I know people that are overweight, yet they have been on a diet for years. They will drink the Diet Cokes and not eat cakes in front of others; however, in their kitchens they will devour the whole cake. The fact is, these people want to be slim, yet they are overweight for years and nothing changes.
Amazon lists thousands of books on “Weight Loss” as well as thousands of books on “Exercising and Fitness.” There is always this fad diet and that fad diet.
I like to keep things simple . . . KISS. I had a discussion with one of the executives of Reuters/Metastock who is an avid sports enthusiast regarding triathlons and dieting. We concurred that if one wrote a book on weight loss, it would be very, very short:
■ Eat less.
■ Exercise more.
Come on, it's simple: We all know that we can lose weight if we just follow those two rules. We reduce our calorie intake and we do some aerobic exercises at least three times a week for a minimum of 30 minutes.
The sad reality is no one wants “simple.”
The more complicated, the better!
Simple works! Robust ideas on trend following work over time!
As in trading, the more complicated, the so-called better!
Why do people keep buying these books and magazines that promise a new diet or a new way to lose weight? In my opinion it is a lack of discipline.
It is almost how beginning traders buy ne
w courses or constantly seek gurus. They believe there is a holy grail or someone knows something more than they do. Either they were never taught robust trend following ideas or they went through an inevitable drawdown and thought to find another method. They gave up on their patience and discipline.
I am not a therapist but it would seem that the short-term pleasure outweighs the long-term benefit of healthy eating. This is exactly like traders who want to be successful, yet they keep on making mistakes in the markets. They are impulsive or they simply do not follow their plan. They are seeking short-term pleasures or profits. They do not have the patience when the trade works. They seek to ring the cash register.
There are millions of books on dieting, yet people are overweight. There are millions of books and courses on trading, yet most people are not successful and lose money. I want to instill in you the methodologies I have used every day for the last 18 years and how to deal with your mind.
I will give you the knowledge, but you have to have the motivation.
They blame the plan: “It's too hard,” “It's impossible,” “It doesn't work.” This isn't true. The ideas I am sharing with you are simple and robust. These beginning traders didn't succeed because they were simply too lazy, or they didn't have the discipline to execute the plan. But instead of working on the true problem—the execution—they think can change the plan itself, hoping that there's an easier way. Successful traders realize that their problem doesn't lie in the plan, but in the execution.
Here's what you can do in order to ensure your own motivation and discipline when it comes to executing the plan:
It's important to focus on the big picture.
Your money will be made over a series of many trades.
No single trade means anything.
No month or any year means anything.
Thinking in these terms will help you greatly execute the plan.
The concept that trading is easy is very dangerous to the financial stability of a trader.
When beginners make money on a trade, they feel like a genius and invincible. Then they can take wild risks and lose everything.
Many beginner traders delude themselves and fall for advertisements promising “You will get rich by day trading,” “Earn unlimited income,” or “Forget about your day job and trade for a living.”
■ Trend Following and Trading Is Not Retirement in a Box!
The average person wants to be told exactly which stock to buy or sell. They want a little bit of excitement or fun. The average person does not really want to work. The average person will risk hard-earned savings on stock tips with less thought than what to eat for dinner. This is why most fail in the investment world.
You need to be self-reliant and believe in yourself.
When you believe in yourself, you are in the right direction of success.
Nothing ever changes in the markets.
Fear and greed never subside.
Jesse Livermore, a market wizard from the beginning of the last century, stated, “Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes.”
If you truly want to change your reality when trading, I am here to help you!
The answer is within you!
You have to learn to think like a successful trader. I will help you but cannot guarantee your success. It is all about you. I will give you all the tools that I have used on a daily basis for the last 18 years! You will have to internalize what I am teaching you, use it as part of your mental framework when trading, and not quit when you hit a drawdown or rough patch. What I guarantee you is that you will go through an ugly drawdown and your worst drawdown is always ahead of you. There will be no surprises from what I teach you and when you actually trend follow under my plan.
Successful trend followers are simply playing the game to win and to compound their way to wealth. And they are enjoying every moment of it. Successful trend followers are humble and low key. They do not need to impress others.
There only exists a small group of consistently successful trend followers and traders. Most traders experience varying degrees of frustration in various degrees including extreme exasperation, wondering why they can't create consistent success. Many look for the holy grail and all types of magical indicators. Successful trend followers do not waste their time in searching for the holy grail.
Hopefully I will instill this in you!
I joined a brokerage in order to learn firsthand who was making money and who wasn't. I was told about the most successful client in the firm. My first reaction was that this “successful client” was one who was “in the know” or maybe a financial professional like someone from Goldman Sachs or Morgan Stanley.
When I was told he was a dentist, I thought he was kidding!
The dentist started in 1979 and has been compounding money ever since. He started with $200,000, understandably a lot of money in 1979, but today he has a $5,000,000 trading account, plus accounts for his kids, and he has taken $12,000,000 out of the markets. He is an example of one who has compounded his way to wealth. As you read on further you will realize this is not a get rich quick or an instant millionaire trader story. Rather it is one where you compound your way to wealth over many long years full of steep and drawn-out periods of losses. The dentist had countless losses. He strived to keep them small and he had the discipline, patience, and focus to get through all the inevitable losses he encountered and draw downs to stay in the marathon of trend following. You can also do this if you truly want it!
■ What Makes a Successful Trend Follower?
Is it intelligence or simply that successful trend followers work harder? Do successful trend followers have better trading systems or computers? Why do the vast majority of beginning traders fail? One has to take into account that most beginning traders are successful in their own right. Many unsuccessful traders include professionals such as pilots, engineers, doctors, and wealthy retirees. More interesting is that most analysts are also not profitable traders. In short, intelligence is not the only answer to successful trading. Actually a greater intelligence can be detrimental. Too often an intelligent person wants to know why a market did whatever it did. There are always a myriad of possible reasons but the simple answer is that it does not matter WHY. The market moved, that is it, and we have a choice to figure out why or try to ride the trend and hopefully make some money. Intelligent people try to analyze things much more than the general populace. I have a colleague who has a sign on his door, Don't think, It will cost you MONEY! In trading there is a lot of merit to this statement. One needs to react and follow one's plan. This is what makes trading so hard. This is a dichotomy from our human existence. We are taught not to be rash or too quick to make a decision. In trading we have to be as we are in the thick of it and postponing a decision such as an entry or exit can be costly.
Reacting in trading means following your plan explicitly.
Your plan needs to be meticulously developed in order that you are not being rash but rather decisive.
This really sums up having confidence and the realization that it is not about being smart. It is about being disciplined and having faith in one's actions.
The reality is that the markets will do whatever they want. There is really no easy way or any way to figure them out. The markets do the unpredictable. A stock goes down with a positive earnings report. Bernanke speaks, which would seem would be positive news, and the markets sell off in a rage. There can be a statement from an official that can set in motion a major bear market. After a speech by Treasury Secretary Jim Baker in 1987, investors began to fear that the weak U.S. dollar would cause further inflation. The Dow dropped about 200 points or 9 percent in the first hour and a half. Prior to the waterfall drop the stock market had been doing great for the first nine months of 1987. It was up more than 30 percent, hitting new highs. The prior two consecutive years had had gains of 20 percent+.