Trend Following – GBPJPY – what it cost me!
I am currently reading the book Trend Following by Michael Covel which talks about the trend following phenomenon and talks to a variety of traders how how they made it trading. One thing which stuck to mind was the advice which I hear time and time again, cut your losers and ride your winners. A few paragraphs from the book write
“A good example of not letting profits run can be seen in trading strategies that take profits off the table before a trend is over. For example, a broker revealed to us that one of his strategies was to ride a stock up for a 30 percent gain and then exit. That was his strategy. Let it go up 30 percent and get out. Sounds reasonable. However, a strategy that uses profit targets is problematic. The biggest problem is that it goes against the math of getting rich, which is to let your profits run. Trend followers ride trends as far as they can instead of taking their profits as soon as they make them. If you can’t predict the end or top of a trend, why get out early and risk leaving profits on the table?”
I completely agree with this and I remembered the frustration of closing out trades only to find they rocket in my direction. If I am to get rich trading as per the paragraph, then I would need to ride the trend and this is what I aimed today.
The GBPJPY chart showed a sell signal and I went short at 159.69. The market went all the way down to 158.50 which was 119 points… and if I traded my usual strategy, I would have got out at about 158.60 for over 100 points of profit. I kept on thinking about riding the trend.. the 1 hour and 4 hour charts were showing a sell still… I decided to leave the trade running but my stop to my open price.
However, from the chart as you can see, right now the market has moved significantly higher and the 5 minute chart is already showing me a buy signal. I have just over 20 points before I am stopped out which would annoy me. That’s the hardest thing about learning something new if you get burnt.. us humans learn by reaffirmation. If we do something and we are rewarded, we will continue to do it.. if it hurts us, we will stop. That’s the thing which makes trading so difficult… you do things right, you get burnt, you do things wrong you are rewarded… then you repeat what you wrong (which rewarded you last time) to find that this time, you get burnt.. so then you try the opposite.. and so the cycle continues. The only way to break out of the cycle is to remain consistent.. you have to recognise that trading is a game where you will experience pain… if your system works for you, you have to stick with it regardless of how many time you get kicked in the proverbial balls…. in the long term you will win!
Still, let’s see if I get stopped out or is there is a miracle and the markets fall before it hits my stop!
