Dear Investors, Are You Following the Trends?
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 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 with 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, reducing your losses & maintaining your gains.
Have itchy fingers? 🙂 When you trade counter-trend, 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, whereas 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 counter-trend traders. Think about how many times you have closed a trade too early, and you will 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 your trade will make a profit or recoup a loss will keep you from getting in the way (thus increasing the chances of honoring your trading plan). If you know yourself to make emotional decisions at a time when reason must 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 thereby missing out on good potential gains in equities.
As a trend trader, you need to beat this security obsession, and leave your trades exposed to controlled risk (because you have the probability advantage on your side). You have 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.
Uncomfortable in Risky Situations? Trend trading increases the chances of closing trades too early, while counter-trend strikes are less psychologically burdensome. In addition, stop losses can be moved to reach the break faster when in a “right or wrong” scenario (thus relaxing the trader’s mind about having to take a loss), while when riding a trend, placing a stop loss can be problematic.
Due to the large stops associated with high probability trades (trend trades generally have a higher probability of success, although they may not always carry the same risk/reward). So, if you’re not the kind of person who likes to live on the edge, counter-trend trading might be for you.
Conservative vs. Aggressive
Not an Adventurer Type? If you don’t mind walking the hard road (which is also safer, clearer & more predictable!), then you’re 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’re in the right direction – you are a trend lover at heart. If you like doing things in a proven, “right” way, if you prefer the known “good” over the unknown “maybe better” & don’t like being first at a party, then trends can indeed be your best friend. .
Are you brave & brave? Some people love the adrenaline of trading as much as they love profits. That’s fine, as long as they don’t like it MORE than profit & start trading for fun instead of cash. If you think that just following the trend once it’s started & after it’s been confirmed is too boring for you, then forcing yourself to do it won’t help & may eventually lead you to undisciplined action.
Stick to counter-trend trading & you’ll continue to experience the fun of moving before anyone else – the satisfaction of doing what you love can help you stay “in the zone” & enjoy your trading hours.
Simple vs. Proud
Like Keeping a Low Profile? If you don’t mind taking 3 losses for 1 win – if wins make up 4-5 times more losses – then you are definitely a good fit for trend trading. If you are not interested in proving yourself or others & what matters is the overall equity curve, not having many winners & being “wrong” is fine & will not put unnecessary pressure on you.
The trend will give you a continuous journey, far greater than your initial risk, moves than can easily cover your 2, 3 or even 4 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.
Do You Like Saying “I Told You”? Some people just want to be right & stick to others. While this is something every trader should always strive for (because the market is the only one that is right all the time!), it’s a personality trait we all have to acknowledge & – why not? – even used as an edge if possible. A positive mindset (given with a high number of wins) can help you stay motivated as long as it doesn’t turn into arrogance.
If you know yourself proud & you often count winners against losers then you should look for a strategy with a high win rate, even if the risk for the prize may not be more than 1:1. Perhaps a counter-trend system can give you that, while a trend-following strategy can create feelings of frustration because you tend to focus more on the negative (win vs. loss) than the positive (favorable equity curve).
The market is a challenging environment & trading is a very sophisticated activity. We really don’t need to add to our own personal weaknesses to complicate our work. We all have to do our homework before we trade, learn about our strengths & weaknesses & come into battle well prepared & armed.
Ee need to understand & fully use ALL OUR EDGES to win in our competition. Other traders are NOT our enemy – the market is an objective and perfect entity, remember? We are our worst enemy, and our indiscipline is the leader of our enemy. The market doesn’t take our money, we give it away through our actions.
We are not a perfect entity, and knowing ourselves, acknowledging our personal personality bias is IMPORTANT to improving our trading results (whether we are beginners or pros).
Analyze your personality carefully before making your trading plan, and find something that will work for you NATURALLY. Always think WHO YOU ARE, not WHO YOU WANT! If you want to improve (and rightfully so!), do so outside of your trading hours. You may not be perfect, but while you are in front of your platform, you should also strive to be a perfect entity: a machine that follows a perfectly pre-designed trading plan.
Some of you are completely “automated” traders (with or without robots), strictly following rules & only rules, leaving no real-time subjective judgments or evaluations. That’s great, because while you might miss some action once in a while, you’re much less likely to get a bad drawdown (usually caused by indiscipline).
If on the other hand you are a DISCRETIONARY trader, you should carefully define the limits of your discretion. You don’t want to be free to do whatever you want whenever you want, putting your entire trading plan aside. This approach can lead to nothing but failure.
Again: discretionary or mechanical trading, trend-following or counter-trend – there is no right or wrong answer.. But when it comes to YOU, there is a better way to do things, which is to know yourself & give the market (as well as everything else) ) something else) the best of who you are.