Man I'm in the mood for blogging recently, and many thoughts keep popping into my mind so I love to pen them down to remember them better. This post is about trend following, and I hope to keep it short. Lets start with a chart of AUDUSD.
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| AUDUSD Daily |
Books and course providers love to promote their systems by showing charts like this. Buy on the arrows, ride the trend to the top, sell and pocket 500 pips of profit! Take a closer look at the chart, there is something subtle that isn't easily noticed unless you've been in a similar situation. Suppose for whatever reason you went long on the three arrows, notice that for each of them prices came back down a few days later and would have put you in draw down before taking off again? Now it is easy to say trail your stop under each swing low or under the ATR 20 and you'll be fine, but try putting yourself in the shoes of a trader holding such a position. You see your position taking a few days to climb 100 pips only to painstakingly watch it drop back down and put you in the red again. And this repeatedly happens. I don't know about you but I HATE THAT FEELING, it makes me a nervous wreck! And know what? 60-70% of the time price will proceed to stop you out in the end because markets chop most of the time and smooth trends are rare.
That is the nature of trend following, you need wide stops to ride trends, you will watch profits turn into losses most of the time, and your win rate will be 30-50%. I'm not against trend following, but the question we have to ask ourselves is: Am I suited for trend following? Is my psychology strong enough to lose more often than I win? Can I tolerate watching 100 pips profit turn into losses most of the time? If not, then probably trend following is not for you.
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