Click here to get a PDF of this post


 

Let me introduce my readers to “Trader Steve” a successful trend follower and blogger from the United Kingdom. He was nice enough to give me an interview for my blog readers. Steve is a trend following trader that pulled off the feat of being profitable in both 2008 as the market was on the way down and he was profitable in 2009 on the way back up as the market rallied, how many investors would like to make that claim? This is how trend followers make money, we simply identify and follow trends systematically with dicipline while managing our risk. This systematic trend following has produced triple digit annualized returns since he began posting systematic trades on twitter. Here is the interview, my readers will notice parallels to my writing and books. Amazing we both arrived at these same conclusions through independent studies and live trading.

First Steve I would like to thank you for taking the time to answer these questions today, my readers appreciate your time.

No problem – I’m always happy to talk about trading, and trend following in particular.

So what was that first spark that got you interested in trading the markets?

I had a passing interest in the markets since my teenage years – I can vaguely remember the 1987 stock market crash catching my attention, as well as the collapse of Barings Bank, and the stories surrounding the dot com bubble. Nobody else in my family invested or traded in the markets. It was only in about 2003 that I started to look at the markets more seriously and put some savings towards starting to trade.


How long did it take you after you started trading to become consistently successful and profitable? What was the biggest key to your success?

It was a good two or three years before I reached that stage. The biggest key was to arrive in my own head at a method that I was fully comfortable with. I initially started by subscribing to a trading chatroom who specialised in day trading high-beta US stocks. I soon found I was unable to make any money doing that – I was too slow in acting upon the signals, and the commissions and spreads incurred didn’t help. So I started gravitating towards longer timeframes, which gave me more time to think and act. The one thing that has stuck with me from those early days was to enter positions on a breakout from a consolidation – something that I still do to this day as entering a breakout now (based on my system rules and scan results) indicates that a potential new trend has been signalled.

If you could start back at the beginning of your trading career and do any one thing differently what would it be?


My risk control was poor – I would trade too large a position relative to my equity, so trading smaller positions would be the one thing I would change. Of course, using a trend following strategy, which historically can have a win percentage less than 50%, exacerbated the drawdowns I incurred. Reading books around this time, such as Market Wizards and Trend Following had a big effect on me. From this I was able to formulate the specific rules for my system, including the risk control I needed, and from then I started to make money. Fortunately I was able to get this sorted in 2006/07, so I was able to generate healthy profits in 2008 trading exclusively on the short side, and then in 2009-10 on the long side.

Would you give us an example you what your inner dialog sounds like after a losing trade? What do you think to yourself?

To be honest these days there is no dialog, providing I have entered a position in accordance with my system rules. Based on a sample size of one, it is anybody’s guess whether you would make a profit – there’s no such thing as a ‘can’t lose’ trade. However I know that over a sample of 100 or 1,000 trades, I will make money. My system has a positive expectancy, but you don’t know in what order your winning and losing trades will arrive. I’ve had periods where only 20% of my trades are winners, and others (in more favourable market conditions) where my win rate is at 80% or even higher. This is where rigid risk control helps you keep on an even keel psychologically, and keep you in the game so that you can profit from those strong trending phases.


What triggers you to to sell a losing trade? How do you know you were wrong and when to get out?

One thing I have always been good at is adhering to my stops – on every trade I have ever placed, I always have entered a stop at the same time as opening a position based on my system rules, and I could probably count on the fingers of one hand the number of times I have overridden a stop.  Both the initial stop and the trailing stops used as a trend develops are positioned in accordance with my system rules. If there is a trend reversal then I will automatically be taken out of my position if my stop gets hit. I never close a position on the basis that I think a stock might reverse at its current price, or it has gone up as far as it’s going to go, as this may cut short a profitable trend.


Are their any market conditions that will get you to all cash and then to just go fishing?

I base my bias on whether to look for long or short positions in stocks on what the general market is doing. 2011 was a difficult year because of the increased volatility and lack of direction in the indices – a non-trending, volatile market state is the worst combination for a trend follower like myself. I have to remind myself not to open too many positions, too quickly following a supposed new trend in the general market being identified, simply due to the increased volatility over the last year or so.

What were the most influential trading books that you read that really showed you how to make money in the markets?

As mentioned above the two that were the biggest influences were Trend Following by Michael Covel, along with Jack Schwager’s Market Wizards (which I think every trader should read). In addition Edwin LaFevre’s Reminiscences of a Stock Operator and Stan Weinstein’sSecrets for Profiting in Bull and Bear Marketsre-affirmed that the big money is made by following the trend. From there I read up as much as I could on the story of Richard Dennis and the Turtles, along with other trend followers. After that it was a question of devising and refining a system I was comfortable with, with appropriate risk control, and then to go and trade.

Where do you like to get your market information from? Any specific websites, charting services, periodicals, or social media that you really like?

I keep track of what’s going on in the markets just by looking at sites like Marketwatch.com, but I do not base my trading decisions on what other sites are saying, or on other people’s trading recommendations. All my trading decisions are based on what my system tells me the general market is doing, which influences my bias as to whether to look predominantly for long or short positions. It’s then a case of running my own scans to identify potential new trades in that chosen direction. I do however keep track of other trend following system performance achieved by CTA’s etc., and I regularly scan the web for other sites that relate to trend following, such as newtraderu.com.


What advice would you give to new traders that dream of becoming rich traders one day?


The sooner you can learn good risk control, the better – the vast majority of new traders trade too large a position, as I did when I started. Controlling risk helps make the psychological aspect of trading easier to cope with. In terms of your basic method, the trick is to find a method that you are fully comfortable using (being ‘compatible’ is the term I use), whether this is in terms of expected timeframe for your trades, amount of time required in front of a PC, the historical performance of the system in differing market conditions, the potential for drawdowns etc. For example, trend following is not for everyone – some of my most profitable days in the markets are when I have done absolutely nothing, yet a lot of people seem unable to do that – they have to do something in the markets every hour, every day. As mentioned above, I was not fully compatible with day trading, on the other hand, as I found myself hesitating when a signal was given.


How can traders learn more about you and how you trade the markets?


I have my own site, www.thetrendfollower.com, which gives readers a flavour of how I trade with example charts, posts relating to the risk management and psychological aspects, and general comments on trend following. In late 2010 I wrote an e-book, The Trading Triangle, which fully discloses my system, the chart setup and the scans that I use. In the last year or so I have also started conducting 1-2-1 training for people who are interested in learning trend following. Both the e-book and the training have been well received, and it is pleasing to see others using the system and making profits.

I really appreciate your time and thanks for sharing your experience and winning principles with my blog readers. I wish you much continued success in the markets.

Thank you – keep up the good work here, and carry on making those profits!