Dear Investor, Are You a Trend-Following Material?
Yes, We Can’t! Or Can We?
Just as there is a big difference between theory & practice, reading trading books & trading the markets is not the same thing. Otherwise, just reading a good investment book will instantly put a lot of money into our pockets.
Similarly – there is a huge difference between who we want to be & who we really are, otherwise we would live in a much better world.
Just as the market is discounting everything, in trading who we are is discounting who we want.
The market is not an environment for guessing.
You can’t predict the market, and you can’t control it.
But you can control yourself, and for the most part, by knowing how you function, you can predict your actions fairly accurately. Besides, no one else can do this better for you than yourself. This is an advantage for you, the trader.
So let’s get personal. Starting from some facts about who you are, let’s try to determine your basic psychological profile & is trend trading really for you or you should be a knife catcher 😉
Patience vs. Fast & Fidget
Are you a patient person? Everyone talks about “honoring your trading plan” & “being disciplined” in your trading & indeed, patience is one of the important individual qualities associated with discipline in trading. While patience is required for BOTH approaches, it is much more important in trend trading, because of the need to stay longer in the market following the trend, cutting your losses & keeping your profits going.
Have itchy fingers? 🙂 When you make a counter-trend trade you have less time to react & enter the trade (if you are slow, you miss the train). Trend trading requires less reaction speed, because the trend you plan to “up” is not something that disappears from one minute to the next, while the opportunities against the trend are essentially fewer in number & more limited in time.
Rational & Organized vs. Emotional & Uncertain
Are you a person driven by reason? Contrary to popular belief, there is more pressure on trend traders than on counter-trend traders. Think about how many times you’ve closed a trade too early, and you’ll quickly understand why. Being able to understand all elements of a trading plan & act on them in a clear and coherent way will help you in following trend discipline. Trend following trades have to work like surgeons, cutting their way through the trend at the right time.
Are you allowing Emotions to take over? When trading against the trend, you will usually choose a trade that is SHORT (compared to the length of the trend). There will be less time to crack under stress, and knowing that your trade is about to make a profit or close on a loss will prevent you from interrupting it (thus increasing the chances of honoring your trading plan).
If you know yourself to make emotional decisions at a time when reason has to win (when trading, it always is!), then you may want to seriously consider counter-trend trading, as trend-following may not be your thing.
Risk taker vs. Safety Freak
Are You Enjoying Good Thrills? Human nature pushes us toward safety (closing realized profits, even small) and away from the unknown (unrealized gains, on the table, risky), even if we have a trading plan and desire to follow it. Most of the traders I interact with (up to 95%, give or take) have at least for some time in their trading career cut their trades too early thus missing out on good potential gains in equities.
As a trend trader, you must beat this obsession with security, and leave your trades exposed to controlled risk (because you have the probability advantage on your side). You need to be psychologically strong enough to take risks without blinking (a controlled & calculated risk, of course – according to your rational & organized personality), as breaking trend dynamics can kill your strategy in the long run.
Not Comfortable in Risky Situations? Trend trading is increasing the odds of closing trades too early, while counter-trend strikes are less psychologically burdening. In addition, stop losses can be moved to break even much faster when being in a “right or wrong” scenario (thus putting the trader’s mind at ease faster about having to take a loss),
while when riding a trend stop loss placement can be problematic due to the large stops associated to high probability trading (trend trading has in general higher probability of success, although it may not always have equally good risk/reward). So, if you’re not the kind of guy who enjoys living on the edge, counter-trend trading may be your thing.
Conservatives vs. Aggressive
Not the Adventurous Type? if you don’t mind walking the beaten path (which is also safer, clearer & more predictable!), then you are probably more of a trend-trader than a counter-trend trader. if you don’t mind taking your pips in the middle of a trend – as long as it’s very clear you are on the right direction – you’re a trend lover at heart.
If you like doing things the proven, “right” way, if you prefer a known “good” to an unknown “possibly better” & don’t like being the first at a party, then the trend can indeed be a good friend to you.
Are you bold & online? Some people like the trading adrenaline just as much as they like profits. That’s OK, as long as they don’t love it MORE than the profits & start trading for thrills instead of cash. If you think that just jumping on a trend after it started & after it’s been confirmed is just too boring for you, then forcing yourself to do just that will not help & may eventually bring you to acts of indiscipline.
Stick to counter-trend trading & you will constantly experience the pleasure of being in a move before everybody else – the satisfaction of doing what you love can help you stay “in the zone” & enjoy your hours of trading.
Modest vs. Proud
Like Keeping a Low Profile? If you don’t mind taking 3 losses for 1 win – if the win makes 4-5 times more than a loss – then you’re definitely well-cut for trend trading. If you’re not interested in proving yourself to yourself or anyone else & what matters is the overall equity curve, not having a large number of winners & being “wrong” will not matter & won’t put unnecessary pressure on you.
The trend will give you sustained rides, much larger than your initial risk, moves than can easily cover for 2, 3 or even 4 of your losses. Consistently scoring a 40% win rate on a 2:1 risk/reward strategy will make you very profitable in the long run, although you will be wrong more often than not.
You Enjoy Saying “I Told You So”? Some people just like being right & sticking it to others. While this is something every trader should constantly try to fight against (because the market is the only one right all the time!) it is nevertheless a feature of our personality that we should try to acknowledge & – why not? – even use as an edge if possible.
A positive mindset (given by a high number of wins) can help you stay motivated as long as it doesn’t turn into outright cockiness. If you know yourself to be proud & you often count the winners against the losers then you must look for a strategy with a high winning rate, even if the risk to reward may not be more than 1:1. It’s likely a counter-trend system may give you just that, while a trend-following strategy could bring up feelings of frustration as you would tend to focus more on the negative side of things (wins vs. losses) instead of the positive (a profitable equity curve).
The markets are a challenging environment & trading is a highly sophisticated activity. We really don’t need to add in our own personal weaknesses to make our job more difficult. We should all do our homework before we trade, learn about our strengths & weaknesses & come to the battlefield prepared & well-armed.
Ee need to understand & fully use ALL OUR EDGES to prevail on our competition. Other traders are NOT our enemies – the market is an objective, perfect entity, remember? We are our worst enemies, and our indiscipline is our enemies’ leader. The market does not take our money, we give it away ourselves through our actions.
We are not perfect entities, and knowing ourselves, admitting our personal personality biases is CRUCIAL for improving our trading results (whether we are newbies or pros).
Carefully analyze your personality before creating your trading plan, and come up with something will work for you NATURALLY. Always think about WHO YOU ARE, not WHO YOU WANT TO BE! If you are into self-improvement (and you should be!), do that outside your trading hours.
You may not be perfect, but while you are in front of your platform you should strive to become a perfect entity too: a machine that perfectly follows a pre-designed trading plan.
Some of you are fully “automated” traders (with or without robots), strictly following rules & only rules, leaving nothing to
discretion or real-time subjective evaluation. That’s great, because while you may be missing out on some action every now & then, you will be much less likely to be hit by a bad drawdown (usually created by indiscipline).
If on the other hand you are a DISCRETIONARY trader, you must carefully define the limits of your discretion. You don’t want to be discretionary to the point of doing whatever you want whenever you want, overriding your entire trading plan. This approach can lead to nothing but failure.
Again: discretionary or mechanical, trend-following or counter-trend trading – there’s no right or wrong answer.. But when it comes to YOU, there is a better way to do things, that comes out of knowing yourself & giving the markets ( as well as everything else) the best of who you are.