When being a trend trader you never know where the big profits are going to come from. You take your entries and follow your rules and let the market tell you what to do next. Here is a simple trade I did in April using a conservative tax deferred trend following account that is very dull system but effective in dollars returned and annualized returns in a trending market.
After the bounce off the 50 day I went long $SPY at around the $157.70ish area near the close on April 23rd, believing this was a trend confirmation after the bounce off support. I took an all-in full $245,000 position in my longer term trend following account.
I was using the 10 day sma as my end of day stop, I would return to cash if this area was breached.
The next three days were a little choppy but stayed above my stop level.
I figured I was only risking 1% of my trading account on this play with the stability of the $SPY the odds were that the most it would fall is 1% to lose the 10 day sma and I could get out or 2% worst case scenario. The upside I believed was a second run at all time highs and a break out that could give me a 3%-5% upside. My thoughts were likely a 1% risk for a possible 3% gain, a 1:3 risk/return ratio on the trade. Risking $2,450 to make $7, 350.
Breaking all time highs in a stock or index out of a long term price range is my favorite place to trade. I fell most comfortable with no over head resistance.
It did make the run for the all time highs, break out and end up in a nice trend.
I ended up staying long for 22 trading days as it held above the 10 day sma. On May 20th and May 21st it seemed to be getting a little toppy being rejected before it could break $168. I was concerned that I would be taken out by a violent move so I tightened my stop to the 5 day ema not recovered by the end of the day. My expectations became $170 in $SPY before the sell off. On May 22nd we broke to above the $169 level and I thought we may not be over with the parabolic run. I was wrong and profit taking set in. I waited to the end of day and went to cash selling in the $166 area and locking in profits since the 5 day ema was lost and the expansion of volatility in the average daily range set off alarm bells that there was going to be short term profit taking at these levels for now.
I was happy and content to take these profits that ended up being $12,894 for one months trend following.
In this particular account I am not as concerned with Alpha, I just like returns in dollars. I am very content to make $24,000-$48,000 in this account with minimum draw downs each year and let compounding work its magic. It is a tax deferred retirement account so I do not pay taxes on this capital and it can grow tax free and be taxed only when I withdraw the money.
This was my 2nd $SPY trade of the year, here is a link to my first $SPY trade of 2013.