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Much More Than Moving Averages with Trend Following

Yesterday I received an email regarding one of my books on Moving Averages. Firstly I want to thank the gentleman for his positive comments…as well as sent him a more comprehensive issues to consider with his trend following. When trend following only 1 aspect is the entry and exits. The most important issues are the risks that need to be addressed. I suggested that he should look at risk per trade…risk per sector….total risk on the portfolio….

Trend following is rather encompassing and many issues to consider. Too many consider only the entries. This is a huge issue that only comes with time and sorry to say losses…

 

 

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Taking Profits TOO Quickly When Trend Following

Taking Profits TOO Quickly When Trend Following

It is very common new trend followers over ride their systems when they profits start to evaporate. This aspect of trend following can become an emotional battle. However the only way a trader stands the chance to succeed in trend following is to be consistent in their rules and do not supersede their rules.

In the below example, I have been long Live Cattle for some time. It has had a nice move with nice( rare) profits. It could be disheartening to give up profits but in trend following this is the norm. You will never sell at the top or buy the bottom. Depending on ones account size, situations like pullbacks ( potentially end of trend as well) could be pull back opportunities to add to the original positions. However with the leverage of commodities this is rather hard and risky. However with stocks, this is more of a scaling opportunity. For example you might have your initial position in which you scaled in as the stock moved up….Situations like pull backs to the 50 Day EXMA….or new highs after pull backs also give entries. In situations like this, I add between 10-20 percent of my total position size. This way if the additional entry does not work….I take my hopefully small loss and move on…

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS, AND FOREIGN EXCHANGE (“FOREX”) IS SUBSTANTIAL.

 

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Interesting Trend Following Stock TEAM

Interesting Trend Following Stock TEAM

There are always stocks moving up and down…One thing to look for are stocks that move up and then pull back….As well as areas  of consolidation. Team is a nice example of trend following stocks. Team is rather extended…but might want to put on your watch list of trending following stocks.

 

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When to Take Profits When Trend Following

When to Take Profits When Trend Following

In trend following there are rules and then there are emotions. The rules tell us we should use a trailing stop. This trailing stop can be based on many personal preferences. However how do you feel when you have a nice profit in a position and your system has been in a draw down for quite sometime? The emotional urge is to grab that profit. However in order to be successful in trend following, constantly we have to do the uncomfortable. I will share a personal trade. I am long the Singapore stock index…Eurostoxx and the French stock market index CAC. On an emotional level I would have preferred not being long any of these. However learned a long time ago I can not choose which trades to take. I especially did not want to go long the CAC right before French elections. Again…you can not choose your trades like you can not choose your family. Actually this CAC trade has been working…Has been means nothing in trend following as we have to ready to give back profits at times in order to be available for a return to a sustained trend. Nothing simply goes straight or down. More of the time we get whipped around with a lot of false breakouts which at best lead to small loses. There is no right or wrong. Wrong is not following your system that should be based on risk per trade..risk per sector and total risk in the portfolio. The funny thing also with trend following, you can do everything ( Right) as per your system and lose money. However when you deviate from your system and make money, the propensity to succeed long term is dismissed.

 

Trend following is you dealing with your emotions. Learn how to overcome your emotions. Learn how to overcome the inevitable fear and greed and the odds of success are greatly enhanced.

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS, AND FOREIGN EXCHANGE (“FOREX”) IS SUBSTANTIAL.

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Why is Cattle Prices Moving Higher- Trend Following

I had this question posed to me, however I had no answer. No one rings a bell when a market starts to trend. More so, we do not know when the trend will end. We use rather simple ideas to get us in….we use rather simple ideas to follow and to try to capture some of the profits. This is what trend following is. Making small bets, realizing most trades will not work out, letting our profits run when a trend starts. More than that…it is all a mental game. How can one feel good when trade after trade goes no where at best and in reality ends up losing money. Trend Followers need mental fortitude…

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS, AND FOREIGN EXCHANGE (“FOREX”) IS SUBSTANTIAL.

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Sizeable Stock Market Gains- Trend Following

New Highs…Confidence …all of the above on the stock market. Trend followers should buy new highs. High can go higher. The complete opposite of trying to buy the low and be smart. Buying new highs or all time highs takes a different mindset. However, it probably best to take emotions out of the trade and systematize your trading. This is exactly how I trade. Method…no emotion…I am very skeptical of this old age bull market…however I know I do not know the future.

Yesterday, the market spent most of the session in slightly positive territory, doing a good job of holding on to the gains of the last two days. Selling in the last half hour erased those small gains and the major averages closed about unchanged. One day is meaningless…rather noise.Leading stocks were a bit higher on the session with the leaders index gaining .14% on extremely low volume. The index closed in the upper half of its trading range, a good sign. What is a major Red Flag is the complete lack of breadth in this market. We have just a handful of stocks accounting for all the gains in the index. Amazon…Facebook …etc…It reminds me of the Nifty stocks in the 1973 crash. This stocks could not go down. They were the retirement of stock market investors at that time. Pension funds loved them as well as the mutual funds at that time…Then BOOM!

Anything can happen….What I found very interesting was looking at the ProShares Short VIX Short-Term Futures ETF. This is trend following!

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Inspiring Mark Cuban Quotes To Motivate You

“Every no gets me closer to a yes.” – Mark Cuban

“Don’t get caught up in how many hours you work. Judge success based on having goals and measuring your results. Hard work, and lots of it, is certainly needed, but focus on what you get done.” – Mark Cuban

“Always wake up with a smile knowing that today you are going to have fun accomplishing what others are too afraid to do.” – Mark Cuban

If you’re prepared and you know what it takes, it’s not a risk. You just have to figure out how to get there. There is always a way to get there.” – Mark Cuban

“Don’t start a company unless it’s an obsession and something you love. If you have an exit strategy, it’s not an obsession.” – Mark Cuban

“One thing we can all control is effort. Put in the time to become an expert in whatever you’re doing. It will give you an advantage because most people don’t do this.” – Mark Cuban

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Trend Following- How Should You Feel

Trend Following- How Should You Feel

 

I want to share story. I was short Soybeans and my protective stop was filled yesterday. As Murphy law always works…I went short as this was the lowest low…had a trailing stop based on ATR multiples. Took my small loss (part of the game) and moved on both from a trading and emotion level. Not emotionally easy to have a trade hit a stop and then reverse. Welcome to trend following. This is reality. Trend following is not easy!

 

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What to Really Think About Trend Following Managed Futures

Investors or want to be investors FORGET! Maybe they want to forget 2007 and 2008 if they were stock traders..

Investing is a challenging endeavor due to the fact we are human beings, that are hard wired to make poor decisions when times get tough. Times are VERY tough for Trend following in Managed Futures. All asset classes have their time in the sun and time under the clouds.

Numerous studies on mutual funds and index funds have demonstrated that the rate of return enjoyed by their investors are a fraction of the overall rate achieved by the fund itself. This is due to human behavior and feelings of euphoria or fear that drive investors to buy and sell at inopportune times. It cannot be overstated how strongly our ‘fight or flight’ response negatively impacts decisions especially of a financial nature. There are two effective ways to mitigate the impact of human nature on investment returns. One consists of true diversification in an investment portfolio comprising disparate asset classes and strategies. A portfolio made up of stocks, bonds, and managed futures (currencies, commodities, bonds and precious metals) since 1986 has achieved a compound rate of return of 9.02% with a standard deviation of 8.95% and a maximum peak to trough loss (Max DD) of -26.61%. Compare that to owning the S&P 500 outright which compounded at 10.14%. Yet that additional 1% of return was accompanied by nearly twice the risk, a standard deviation of 14.99% and a peak to trough loss (Max DD) of more than 50%. It’s one thing to see returns on paper but something entirely different to experience them in real time. It’s no wonder investors are unable to keep up.

All too many have forgotten the 50% + draw downs in the Stock market. Warren Buffett had 2 long periods of time in which he was down approx 50%. It was inferred he was a has been or senile or whatever terrible comment. Investors want it now. Now does not always exist.

The second way to mitigate the impact of behavior on investment returns is through utilizing a rule based systematic process. Most managed futures trendfollowing are systematic. However this has not been a savings grace. It has been UGLY. 2015 and 2016…rather poor….then include 2011,2012,2013 it is easy to see why so many have quit.

 

By following predetermined rules in making investment decisions, one is prepared in advance for all market environments. Even with that said….it is not the depth of the draw down rather the duration of the draw down.

 

Instead of making discretionary decisions under fire in times of stress, having rules allows you to benefit from these occasional dislocations. In addition, a systematic approach allows investors the ability to implement a statistical edge that works over time not all the time. Finally, through disciplined risk management a rules based approach determines the exit point of an investment before it is entered, preventing unprofitable positions from causing lasting damage to a portfolio. Rules allow an investor to remove what is often their worst enemy when it comes to investing; themselves. Even with all of the above…Trend Following takes mental stamina. This morning I woke up to my long Gold position going the opposite way….along with the grains…and bonds….( typical)…Just one position gapped up….French Stock Market…That could have easily been the opposite. In trend following we just do not know. We have to try to put on small trades and see if they work…

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS, AND FOREIGN EXCHANGE (“FOREX”) IS SUBSTANTIAL.

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Stock Market Crash Alert- Trend Following

Yes…the stock market has been trending upwards…however that has waned…

The realities are as follows…

 

Company valuations are sky-high.

At 26.44, the S&P 500’s Price/Earnings ratio is the highest EVER, except for 2008 crash and the 2000 crash. You decide if it is a good time to invest????

At 28.93, the “Shiller P/E ratio”, which looks at company valuations over a longer-term, 10-year period and adjusts for inflation, is at the highest level EVER, except for two occasions again… 2000 crash and do not want to say the 1929 crash. Wow!!!!

Price to sales ratios are near the highest levels in at least 50 years.

Price to book ratios haven’t been at this level since the 2008 crash.

And the stock market cap to GDP ratio is the highest since the 2000 crash.

Bloomberg came out with Paul Tudor Jones described these expensive stock market valuations as “terrifying” earlier this month at a closed-door asset management conference hosted by Goldman Sachs. Immediately there were pundits…however facts are facts…

According to Yale University’s Stock Market Confidence Index, for example, over 90% of individual investors believe that the stock market will rise in the next 12 months.

 

How much longer can the insanity continue? All asset classes are at bubble levels…

You tell me…

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