The principles that successful trend traders use to make money in the markets is difficult for the average investor or trader to understand.
Readers unfamiliar with systematic trend trading have a hard time grasping the concept of trading for profitability without trying to predict where price will go next. Most successful trend traders have preset planned entries that are triggered by a reaction to a new high or low price being hit. They use quantifiable price levels and indicators like moving averages to know when to enter and exit a trade and do not rely on any attempt to ‘know’ what will happen next. They buy or sell short in the direction of the dominant trend when they get a signal that shows the potential for a trend, they do not predict the trend… they simply attempt to follow it.
Even though many professional trend followers that manage money have had huge long term gains and have compounded managed capital over many years, some critics complain that many trend traders have large draw downs. While 20% drawdowns are unpleasant to trade through, traders of all types do have drawdowns and many traders that trade against trends and do not manage risk carefully blow up eventually. It is very difficult to argue with the many trend followers that have made fortunes with reactive technical systems over the long term.
Anyone who says they can predict the stock market with certainty cannot be trusted. It is delusional thinking to believe they are smarter than all the participants and can see all events that move markets ahead of time without the aid of a working crystal ball or time machine. Trend followers simply use preset price signals to identify trends, they manage their risk on every trade, and they follow their system with great discipline.
As long as markets trend then trend-followers will be winners in the zero sum game over long term.
Here are some of the commandments they trade by:
1. You shall back test and develop quantify robust trend trading systems that are profitable over the long term.
2. You shall identify and follow the long term trend in the markets you trade, and have no guru that you bow down to.
3. You shall not try to predict the future, that is a fool’s game, but follow the current price trend.
4. You shall remember the stop loss to keep your capital safe from destruction; you shall know your exit level before your entry is taken.
5. Follow your trend following system all the days that you are trading, so that through discipline you will be profitable.
6. You shall not give up on your trading system because of a draw down.
7. You shall not change a winning system because it has had a few losing trades.
8. You shall trade with the principles that have proven to work for successful traders. Manage risk, go with the trend, and diversify so your days in the market will be long.
9. You shall keep the faith in your trend following system even in range bound markets; a trend will begin anew eventually.
10. You shall not covet fundamentalist’s valuations, CNBC talking heads, newsletter predictions, Holy Grails, or the false claims of any of the black box systems.