Review of The Bible of Trend Following

Review of The Bible of Trend Following…
Thank you…I put my heart into this book actually for my children…

I have a losing streak for a long while. Lucky that I came across this book, read it and realized what wrongs I, as a trend follower, had made and what rules I had not followed. I am sure that this book can be helpful to all traders no matter what style they use. In short, a must read. Highly recommended!

p.s. Below please find some of my favorite passages for your reference.

Here are some sample questions and reminders to address in your journal.
Did you follow the exact plan?
Did you overtrade this week?
Did you put too large a position because you thought the trade would work?
Did you put too small a position due to fear?
Did you let your emotions get the better of you?
Did you let fear or greed overcome you?
What about ego? Did you have to be right on a trade?
If you made mistakes – do not beat yourself up.
Look out the front window, not the back window!
Admit a mistake, learn from it, and move on.
Be committed. Pg34

The key to success or compounding money over time is the ability to stay focused, stay disciplined, follow the plan and have patience. This is the holy grail! pg36

Set parameters for entries that are robust, clear and repetitive; follow the signal with the proper risk and money; and let the possibilities work over time. This gives you the potential for success over time. In conjunction with the entry signals you have to have realistic expectations. Too often traders over exaggerate what they expect. They set themselves up for severe disappointment. Pg38

Athletes do not become Olympic athletes overnight. They train and go through much pain until they reach their goa. In today’s society people want instant gratification. Compounding money is not easy to do in our society that is solely focused on instant gratification. The trend follower’s ability to delay gratification and inevitable losses give him or her the potential to succeed over time. Have the deep desire to be long term consistent and successful via trend following if you want to succeed! pg38

Nobody has ever been able to demonstrate that a complex mathematical equation can answer the question: Is the market moving in an uptrend, downtrend, or simply just sideways? – Richard Donchian pg45

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. – Ed Seykota pg46

I was an observer of my actions. I was not a participant in my emotions. I added several risk filters after losses such as sector maximum risk and total open trade risk only after analyzing my errors…..accept the risk of trading and that you can lose money. Pg47

The reality is that trading is inherently risky. If you were to engage in any highly risky activity other than trading, you would clearly spend some time considering how to protect yourself. It can be as mundane as riding a bicycle and wearing a helmet. I would assume before someone jumped out of a plane they would check their parachute. They probably have a backup parachute. In my trading I trade with a backup stop similar to a backup parachute. Pg77

The only way to approach it has to be quantitative. There has to be no guessing or interpreting. Pg91

Having a trading strategy is probably the single most important thing you can do in order to succeed with trading. It means having a predefined set of rules that you have developed or accepted for your trading. It means knowing what you are doing instead of just gambling. If you cant follow the plan, I strongly suggest you do not start trading. Pg95

It is not about being smart or trying to prove something to anyone. There will be no need to try to pick tops and bottoms. Accept the truth when the trade did not work and there is no need to hold on. Do not allow yourself to get caught up in positive or negative emotions. Understand the psychology behind trading and not just know that no trade is guaranteed but also internalize the fact. Work on your mental state. Pg139

Your money will be made over a series of many trades. No single trade means anything. No month or any year means anything…..when beginners make money on a trade, they feel like a genius and invincible. Then they can take wild risks and lose everything. Pg141

Too often an intelligent person wants to know why a market did whatever it did. There are always a myriad of possible reasons but the simple answer is that it does not matter WHY. The market moved, that is it, and we have a choice to figure out why or try to ride the trend and hopefully make some money. Intelligent people try to analyze things much more than the general populace. I have a colleague who has a sign on his door, Don’t think, it will cost you MONEY! …..One needs to react and follow one’s plan/ this is what makes trading so hard. This is a dichotomy from our human existence. We are taught not e be rash or too quick to make decision. In trading we have to be as we are in the thick of it and postponing a decision such as an entry or exit can be costly. Reacting in trading means following your plan explicitly. Pg143

One can rationalize or try to find the reasons why the market sold off. Intelligent people live for reasons. If they cannot find a reason, they invest a great deal of emotional energy in analyzing. There is no reason to analyze. Market do whatever they want. Our job is to follow without wasting time looking for reasons. Pg143

One of the tactics in the Marine Corps officer’s manual is either go forward or backward. Don’t just sit there if you are getting the hell beat out of you. Even retreating is offensive, because you are still doing something. It is the same thing in the market. The most important thing is to keep enough powder to make your come back. Let Marty Schwartz’s experience serve as a lesson on how to be trader. No opinion, follow the plan, cut loss immediately, and realize that if you run out of money, you cannot keep on trading. Pg144

When I put on a trade I ask myself how much this is going to cost me to see if it works. Losses do not cause me any anguish or emotional discomfort. The markets will at times inflict pain or cause frustration. This is the reality of trading. The only way to avoid this pain or frustration is not trade Our job as traders is to take both the pain and frustration in stride. The markets do not care about you or me. The markets are going to do whatever they will do. You cannot avoid losses or avoid the pain. You need to accept it as a reality of trading. What you need to do is control how you react to the situation. The situation is just the event. Our reactions are what are detrimental to our psyche. When you have a well thought out plan that you follow exactly, you build to some degree immunity to your personal reactions. We have accepted the risks that are inherent in the market. There is no fear, greed, or ego that inhibits us. Pg144-5

There are only four possibilities. A big loss. A small loss. A big profit. A small profit. Pg145

The market is never wrong. Do you want to be right or do you want to make money over time? Trend following success is more dependent on discipline than any pure academic achievement….Losses are simply the cost of doing business or the amount of money I need to make myself available for eventual big wining trades….There is no being right or trying to avoid a loss. Basically they are not trying to prove anything other than to make themselves available for potential profitable trades and compound money over time. Pg148

Basically the only certainty in trading is uncertainty. You define any risk in advance because you know there will be uncertain situations and things can go to extremes. One thing that helped me to eliminate the emotional baggage was to mitigate my expectations. I have no expectation that any trade will work. I mitigate my expectations of profits. Pg150

Successful trend followers know that they do not know what will happen. They think in terms of probabilities and possibilities. Once one thinks in terms of probabilities one becomes more confident, less stressed and less fearful. pg153

There is no fear, greed, bordom, or even having fun. Trend followers with a plan Just Do It, trend followers focus on execution. They are consistent. Pg155

Be Sociable, Share!

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>