Some traders who take on a trend following approach to trading the markets make the mistake of not fully understanding what to expect from it. As a result, they have unrealistic expectations.
This only ever leads to disappointment and despair when things don’t go the way they had originally envisioned.
This can often be enough to derail the entire strategy. For instance, some traders have no idea what it’s like to experience that many losing trades. They understand the concept of having 3 winners out of every 10 or so, but when they come to trade it, they panic after 5 losing trades.
This is a side of trend following no coaches seem to tell us about.
Well, in my experience, you have to know your system intimately in order to be able to execute it correctly.
Recently I met a trader who had abandoned a trend following strategy using daily charts because he wasn’t making the 30% a year he wanted to make. Yet he was only 3 months in. This is a prime example of an unrealistic expectation.
Another trader I know from the UK made 7 trades in the first 2 months and wanted to know why he hadn’t had any big winners so far. He clearly didn’t fully comprehend just how long he would need to trade for before he would be able to bank any big wins. On his timeframe in particular, most winning trends took longer than 2 months to grow. He incorrectly assumed big trends would materialise and finish their run within 2 months. It was grossly unrealistic for his strategy to achieve that.
Not educating yourself on the system you are using and not truly knowing what to expect from it can seriously knock you off track.
In my experience you will want to know:-
- How many losses can I expect?
- How big will they be?
- How long will I need to trade this before I see results?
- What sort of results can I expect?
- What sort of stops will I need?
- What are the common reasons people fail?
- How much time will I need to invest?
- Where’s the evidence that any of this works?
- Why does it work?
These are just a few of the questions you’ll want to have answers to before you take on any new strategy or system. Otherwise, what the system delivers and what you expect it to deliver may be completely out of alignment. That’s not a recipe for successful trading.
So my question to you is, based on your own system you are trading, do you know the answers to those questions?