Why trend followers end chasing the trend...?

Trend is our friend. We all like to follow the trend but some how end up buying the top and selling the bottom. No matter what system we follow, somehow, we all manage to end doing just that...

I want to initiate a discussion on this topic. When our intention is always to follow the trend, why do we end chasing the trend. We wait for signals to confirm a trend change. And by the time we enter, trend reverses...

Those who play with strict stop loss, somehow have the statistical edge since 40% strike rate with a risk reward ratio of 1 : 2 will ensure we go home with a minor loss in our worst days. But not all of us are disciplined. We take profit early and let the losses run. A stage comes when we are always at breakeven or with minor losses end of the week. And we console ourselves that we are almost there. We think we are at the thresh hold of making the giant leap into financial freedom, yet success eludes us.

I wonder if its a problem with the indicators/setup we follow. Too much of it or lack of it or too much reliance on a single indicator / setup. When we sit and look at the chart EOD, everything looks so clear. But very few of us are successfully able to capture 80% of the day's range.

I personally am a victim of scalper's mentality. I exit too soon. On a nice trending day, i look at the charts and curse my self for being so cowardly. On a nice sideways day, I end up doing better than some of my friends and that makes me pat my own back. But fact remains, If the market is going south, i look for opportunities to go north. After getting a signal and a confirmation of the same from some of my indicators, i enter, only to get my SL hit. Thankfully my Sl is always small, so i end the day feeling mentally bruised. A simple moving average cross over system follower ends doing far better than i do on a nice trending day.

Shiree and AW10 and a lot of seniors i follow avidly, all seem to give the same message. That its a quest to rediscover my own self. Trading is a Psychological game with ones own set of beliefs. Every day market teaches us something new about our own self and our abilities to handle emotions.

I want to initiate a discussion on this topic. When our intention is always to follow the trend, why do we end chasing the trend. We wait for signals to confirm a trend change. And by the time we enter, trend reverses...

Those who play with strict stop loss, somehow have the statistical edge since 40% strike rate with a risk reward ratio of 1 : 2 will ensure we go home with a minor loss in our worst days. But not all of us are disciplined. We take profit early and let the losses run. A stage comes when we are always at breakeven or with minor losses end of the week. And we console ourselves that we are almost there. We think we are at the thresh hold of making the giant leap into financial freedom, yet success eludes us.

I wonder if its a problem with the indicators/setup we follow. Too much of it or lack of it or too much reliance on a single indicator / setup. When we sit and look at the chart EOD, everything looks so clear. But very few of us are successfully able to capture 80% of the day's range.

I personally am a victim of scalper's mentality. I exit too soon. On a nice trending day, i look at the charts and curse my self for being so cowardly. On a nice sideways day, I end up doing better than some of my friends and that makes me pat my own back. But fact remains, If the market is going south, i look for opportunities to go north. After getting a signal and a confirmation of the same from some of my indicators, i enter, only to get my SL hit. Thankfully my Sl is always small, so i end the day feeling mentally bruised. A simple moving average cross over system follower ends doing far better than i do on a nice trending day.

Trading is a Psychological game with ones own set of beliefs. Every day market teaches us something new about our own self and our abilities to handle emotions.

Hello linkon....

Trend followers loose money on sideways days and make money on trended days....but money you made on trend days must be too large to take care of the money you loose on a sideways no trend days. This can only happen if you dont book profits too early and add to your winning position in the trend.

It is a human tendency to resist what is currently going on and do something different and that is why we book profits too early...also sometimes take contra trend positions and on sideways days we are rewarded for doing just that and market makes us believe that it is a right thing to do.But we will never be able to make big money in trading unless we learn to trade the trend till its end...add at every possible place and make a killing when we finally reverse on a trend change. Unless we do that we will always remain a two bit traders..making some money here,loosing some there....

There is no bigger secret to trading success than the one mentioned above...the earlier one recognises that,the earlier he sets himself on the path of successful trading.

Best wishes,Happy trading.....

Smart_trade

See the highlighted portion of your post. I would correct it as 90% of us. That is the root cause of the problem.

Ever tried to figure out why? Because, all of us are accustomed to our school system where only correct answers are rewarded and wrong answers are punished. I would say punished rather severely even to the extent that we even hate to admit that we are wrong. If you had appeared for professional course entrance exams, you will know it even better than any one else. Student who scores 99.90% gets the seat and the student who scores 99.85% doesnot get it. Can you really make a distinction between those two? You cannot. Infact, the student who got 99.85% may be better than the other one. Just because he ticked one answer wrong, he is punished for his whole life. The example I have given here may be slightly exaggerated, but the intention is to point out how a bad habit is inculcated in us right from our childhood and all through our formative years. Parents accept the child only when he gets first rank. Gifts are showered on the child only when he gets first rank. One mark less, noone bothers. All this forces us not to commit any mistake. It also forces us not to admit our mistake, even if we commit one. Because no one has pardoned us when we committed it and much worse no one has told us to forget it and much less no one has told us to realise it and make a concious decision not to make it in future.

As Mark Douglas would say, markets are just random and "anything can happen". Trading is a game of probability. Even the best system will have its own drawdowns. All that I am pointing out is that your decision can be wrong even without your fault or the fault of your indicator or your system. But the whole problem arises in acknowledging the fact that one system/analysis/indicator is wrong. The delay in acknowledging this FACT digs even a deeper hole and this deeper loss makes it even more difficult to admit the mistake which we have committed. Got it? Do you need further explanation?

When the position turns in to profit why do we exit early only to see that had we stayed there we would have made even far bigger gain? Because we are afraid to loose. Afraid to give back a few rupees of profit. Our inner mind tells us that if we give back, then it is amounting to committing a mistake, which as I have alredy told is very difficult to acknowledge.

Why do we hold on to loosing position? Same answer. We refuse to acknowledge our mistake. If we book the loss, it amounts to admission that we have committed a mistake.

Did you ever notice the difference of feeling in exiting at a small profit (and missing bigger profit) and exiting at a small loss (forget about exiting at bigger loss for now)? Which one is the worst experience? It is the exit at loss is the worst experience. Why? Because, in the former case, we have a justification that our initial decision was correct and we try to mask our wrong decision to exit with this justification. We try to say that we were correct in exiting. Our mind invariably searches and even finds one "reason" which perfectly justifies our decision to exit at a small profit. But we could not justify or get any reason for the trade that has entered in to a loss right from the time we took our position. That is why pain is more in exiting a trade at small loss. Our mind fails to think that this small loss could have easily grown in to a huge loss and it would have wiped out the entire capital. Eventhough the decision to exit at a small loss was the best decision and I would say even better decision than the one to exit at a small profit, our mind fails to recognise this aspect as it is preoccupied with defending ourselves from admitting the fact of mistake in entering that trade.

Someone suggested me this solution. Enter and exit many trades in very very small lots over a long period wherein one must take small loss. He even went to the extent of deliberately entering in to lossing trades, though I would beg to differ on doing it deliberately. Intention of taking small losses is to accomodate our mind towards taking loss and acknowledging the fact of committing a mistake. When this exercise is done over a long period and over many number of trades, our mind begins to accpet the fact that losses in trading are inevitable. We ackowledge that markets are random and "anything can happen".

What I have commented above is not limited to trend followers alone, but to traders of all forms of trading.

I sincerely hope this helps
Regards
R. S. Iyer

Trend is our friend. We all like to follow the trend but some how end up buying the top and selling the bottom. No matter what system we follow, somehow, we all manage to end doing just that...

And we console ourselves that we are almost there. We think we are at the thresh hold of making the giant leap into financial freedom, yet success eludes us.


I exit too soon. On a nice trending day, i look at the charts and curse my self for being so cowardly. On a nice sideways day, I end up doing better than some of my friends and that makes me pat my own back. But fact remains, If the market is going south, i look for opportunities to go north.

That its a quest to rediscover my own self. Trading is a Psychological game with ones own set of beliefs.

Linkon

The way I see it you have to define what you want from the market. Do you want to be a good trader who makes money or do you want to make money from it. The two are two different things. Let me explain.

The way you have tested different system on this forum and a host of others which you may not have gone public about shows your strength to be good at thinking through on developing a system. When it comes to implementation you are getting short changed. Implementation for 90% of traders is a bugbear. So why not delegate your weakness? You focus on developing a robust system, back test it and when it is ready for implementation have some one do it for you. They have to trade according to the rules laid down by you. They will be rewarded for following the rules not for thinking on their own. This way if your system is robust, you take the "I" out of trading permanently.

There is no point is wasting a lot of money and time to discover what it was that happened in your childhood that prevents you from implementing a good system.
You are a creator. Enjoy your creations in a hassle free manner. Devote your self to your strength and delegate your weakness. Many of the major traders have done that.

If you have read about the Turtle experiment, although it is not mentioned any where, to me the greatest insight or take away from that experiment was that when you lay down the rules and ask other to trade the rules, you remove greed and fear from trading and the person following your rules has no incentive to put on a trade outside the rules as they do not benefit from it.They will be successful traders. Look at what happened to so many turtles once they left the program and traded on their own. Most of them were disasters.

Once a system is developed and it is traded mechanically, money making will be a boring job. Enjoying the money made, ah that is something else.

When some one else is trading for you, you can really buy that dog and take it for a walk and enjoy that.