The Trend Following Paradox

Chat with Traders EP 43 - with Jon Boorman.
Personal Notes.

This is one of my favorite episode so far about trend following. It tells us just how any trader all starts with making mistakes. But it also shows us how successful traders are separated to the rest of the crowd by how they respond to those mistakes. He also tackles on how trend following is easy but not for everyone. And for me, some of his points are somewhat similar to paradoxes where ideas are contradicting but totally make sense. Confused already? Anyway, here are my notes:

Winning by losing.

Most people think that winning and losing are two separate results of something that you do. It is only a win when you win. It is only a lose when you lose. Two separate paths.

Most people look at losing and winning this way.

But winning and losing can also be viewed in another way. This is where you can turn your losses into wins.

A better way of looking at it.

You basically also 'win' by learning from losing. Then using that learning to actually win. You don't win anything if your loss didn't teach you something. This is general to all types of traders. Even him, a seasoned trend follower trader, has made a lot of mistakes back when he was just starting.

"Not truly having a trading methodology."

We all have been there. I guess most of the new traders take this path because... let us admit it, we're so eager to be earn big but in doing so, we turned up losing money. We want it fast and easy. We jump right in without having a plan.

Not having the patience. Specially for new traders trying out trend following. Instead of learning by studying, new traders ended up learning from doing mistakes and losing money.

Also, another way of learning from losing is always look back on your trades, especially the losing ones. For they can tell you where you can improve on yourself and on your system.

Smalls steps bring about big changes.

Take it slow if you want to survive in the long term. Invest in time and invest in yourself first. Study the basic and essentials. Develop the right mindset and habits.

"It's about having a plan. And one that suits you."

One that fits your lifestyle. Your personality. Your psychology. Be clear with your objectives. Do not try to target big returns or focus on the returns itself.

"Goals should be process-oriented. Not result oriented. Stick with the process and the outcome will follow."

Get a little better everyday and eventually it will accumulate into a bigger and better you.

To make money, don't focus on making money...

...focus on protecting what you have.

"So that you're in a position of strength when better conditions then return."

Trend followers don't forecast how much they will profit in a trade. Trend followers react to price and never predict. They have specific rules that involves certain risk management. An up or down move of the price may determine if they will increase or decrease their initial position.

Trend following, just like any other profile, works because of good risk management and position sizing. Yes, you will have more losing trades than winning ones but by properly incorporating good risk management "your average wins will be far larger than the average loss." Which brings us to the next point...

You win big by losing small.

You'll have less trades. More losing than winning trades. You're hit rate will be lower but you will still be profitable. And again, I know that you hear this all the time but, it still comes down to letting your winners run and cutting your losers quick. If you have a losing trade that is making you feel uncomfortable, cut quick, because you can always get back in.

Yes, you'll lose. In fact, you'll going to have have losing streaks but position sizing will keep you in the game. You cannot control price action or if your trade will be a winner or a loser but you can control how much will it impact you by having the right position size.

It is so simple yet everyone doesn't use it.

Trend following is simple. But why does everyone not using it?

Well, 'simple' doesn't necessarily equates to 'easy'.

"The things that makes trend following work are the hardest thing to do."

They enter at overbought levels. There's no such thing as 'expensive' for a trend follower. They don't buy at the lows when the prices are cheap. They buy high when the price seems too expensive and they sell higher. Trend followers never buy at the bottom or sell at the top - they capture chunks of trend/moves. They trade less often. They wait for EOD signals. They have less screen times. They're not glued on the screen and watching every tick.

Let's take Van Tharph's breakdown of the term 'Trend Following'. He took the first part of it which is 'trend'. A trend follower needs a trend to make money. Be it a trend in price action (higher highs, higher lows), strong darvas boxes or trend alignment of moving averages. If there is no trend at all after you buy, then you will not be able to sell at higher price (buy high, sell higher). 'Following' is the next word. We wait for the trend to shift first to our favor, get in, then ''follow it', until it shifts again to a no-trend or to a counter-trend.

It basically requires them little physical effort by doing nothing for longer period of times but at the same time requires them a huge amount of psychological effort in their sitting and waiting - the 'following' part - which basically requires their 'patience'. And most people struggle with that. They feel compelled to always move and act. And that's where the struggle starts.

The beauty of Trend Following is its simplicity, but it is precisely because of that that it makes it so hard for many people to implement and execute. - JB