.... The best way to trade/invest is a trend following system. But that presumes you can predict a rising market/sector/stock, and feel confident that you’re early in the cycle. Not easy, but certainly the percentage play.
From what I have learnt so far (admittadly I am only to kindergarten level) is that a basic tenet of the trend followers is that you cannot predict the future. The theory goes that everything will trend, sooner or later. The trick is to:
a) Be positioned to take advantage (and profit) when the trend does occur.
b) Make sure that you never put yourself in a position to lose all of your money so that you can stay in the game. This, in their terms, is Money Management and is the most important part of the whole deal.
The trend followers generally run something like 60% of trades are losers and 40% are winners. The reason that they are ultimate winners is that they make more on the winning trades than they lose on the losing trades. This sounds sensible when written down but (it seems) is much more difficult in reality. It requires a major mindset adjustment. The human condition is that we want to be right - if we attach our own value of ourselves to "being right" then those sort of statistics are very destructive to our own ego. Thus the first step in the Trend Following process is to break that nexus between being right and our own self worth.
The other issue with trend trading is the matter of Drawdowns (DD) which can be as high as 35%. Ie there will be times when the Trend Follower will have a losing streak that will reduce their capital by up to 35%. Most people cannot handle this and bail. It is for this reason that very few fund managers run Trend Following funds. If a managed fund suffers a 20% DD then most of the investors will withdraw their funds - even though they may have made 100% in the previous year.
For me, the only way to deal with these issues of the mind is to be totally, totally convinced that the system you are using does work. This means putting in the work to develop and backtest your trend following system yourself. The developers of the Turtle Trading experiment (a Trend following system) have said that you could publish the Turtle Trading rules in the Newspaper tomorrow morning (they were a secret for more than 20 years) and still very very few people would be able to successfully trade them.
The Money Management of these types of system basically revolves around position sizing determined by risk. The risk is determined by a very simple volatility calculation.
Geffa, I think I have mentioned this before but you really should check out http://turtletradingsoftware.com/forum. If you are enjoying this thread then you will revel in the intellectual and courteous discussions. Andrew, now that I have belatedly taken your advice and am reading ROSO I insist that you also visit this forum - a great place for you to exercise your obvious abilities.
G'day 1boyplunger,
For a long time I had wondered about your nic (I had suspected some sexual connotation - perhaps that says more about me than you. LOL). Reading ROSO it now all becomes clear. :)
