Trend Following – have a plan and stick to it

Stockradar’s trading strategy is based on
Price Based Trend Following techniques
devoid of fundamentals or news information.

This is Trend Following – No Predictions or Forecasts

I have done a lot of reading over the holidays (as well as taxiing the kids around) and more than ever in this difficult world it reinforces my focus on the need to dispassionately follow trends for trading guidance. My objective is to be ever more vigorous in projecting the argument for solely using price as a tool that offers a successful path to trend following trading profits and in protecting capital. This is the focus of my site, my approach, my narrative, and my portfolios. When you find something that works you shoot hard at it, have belief and conviction in it. We all need to grow and learn to keep us active and vital, so too does a website need to grow and evolve as we go through the ongoing steps of learning and the process of evolvement. The mood and tone of the site will build on our success and become even more scrutinising of entries and this will help you all reap the well-recognised benefits the path of price and trend following offers. In the end we all passionately seek the same end of financial freedom, happiness and safety in this sometimes-darkened world.

This is the only trading strategy that can be traded on a desert island. As long as price data is available, all else is inconsequential. Media, fundamentals, broker opinions, talking heads, and so on are simply not necessary to profit

Michael Covel – Trend Following

Below are principles that underpin a price-based trend following strategy

  • My modus operandi is price, I then follow a trend only after it develops.
  • Every stock is viewed the same way with each representing nothing more than a trade opportunity to me.
  • I never predict, I only respond.
  • Mechanical trend trading demands self-discipline to follow precise rules.
  • Identify, act, ride, and exit.
  • Markets don’t care about me or you
  • Markets go up, down, and sideways. They trend. They flow. They surprise.
  • All technical trading decisions are predetermined in response to certain price action.
    If that happens, I do this, if this happens, I do that, and so on.
  • It’s a strong marriage of Trend Following and Risk Management
  • The experts tell me the stock can’t go any higher, but it did
  • People put too much premium on being right, I can easily accept the idea of being wrong. This greatly assists with the implementation of risk management
  • I have learned to trade in a way that make money when you are right and not lose money when I am wrong.
  • My aim is always to improve the times I am right and reduce the times I am wrong.
  • Markets don’t always present the right opportunities so be vigilant, objective and patient, and wait for the right time.
  • Our aim is to take a ‘chunk of the trend’. Waiting for confirmation of the price to turn up and then to protect when it turns down. Top and bottoms are an unrealistic expectation.

Patterns and Trends.
‘They are like surfboard riders, who study the movement of the waves, not in order to understand why they behave as they do, but simply in order to be on hand whenever they surge, to catch them at their crest, to ride them as far as they can, and to dissemble before they change direction’

It is the principles above that guide Stockradar through the markets through including such events as the stock market crash. These portfolio results have been built over a long period of time reflecting the patience we need and the focus and discipline to implement the trend and risk management strategy effectively.

Morton S Baratz. The investor’s Guide to (Futures) Money Management

2007/08  GFC – had minimal effect

Trading rules were followed

Risk management rules were followed

Equity base is retained

Allows leveraged growth from the higher capital base.

Let’s put it simply and clearly.

Below is a summary and my interpretation of the key elements that surround the decisions we make as to who we are and how we will approach the markets. Recapping Michael Covel’s outstanding discourse on why an ‘undistracted’ trend following approach is a great focus to have has been a highlight of this holidays reading. Also reviewing my favourite Nicholas Darvas book, How He Made $2,000,000 on the Stock Market many years ago is a great reinforcement of the absolute distraction news and fundamentals play in our trend following world. They reflect my own values and beliefs as a trend following trader and support the ongoing development of Stockradar as a resource to help and guide all trend followers.

Which one do you want to be?

1987, 2002-2003,2007-2008 were all significant market panics that left the investing public feeling bruised, battered, uncared for and deserted by the financial industry. They will never help you in these times so don’t ever expect it. But there were the smart disciplined men and women trading the markets with integrity and clear goals that achieve great returns year after year. We need to examine the beliefs and self-perceptions to understand what keeps their earnings honest and growing.

How do you consider investing?

After the events of 1987, 2002-2003,2007-2008 did you find yourself angry with the experts, analysts, your stockbroker or financial advisor? You listened and followed their advice. Understandable. You then held on to your remaining investments hoping they’d turn around and buy and hold was still a winning strategy. Or you lost money in these markets but still enjoy the thrill of trading markets in the hope of making some profits. You win some, you lose some, boast when your winning, and feel depressed and low when your losing, but you know when you win you feel great and you made some great money when you followed a hot tip. Overall, you’re still a loser.


A better way is to be totally objective and rational. Have confidence in your own plan and decision making and don’t rely on others. You can wait patiently for the right opportunity and are happy to buy a stock making new highs. You also know when you’re wrong you exit immediately and feeling psychologically liberated from the weight of carrying a loss as you move on and save your money for another day. My view is that you should treat trading as a business of profits (income) and losses (expenses) as you become business like and emotionally detached from any decisions.

The first is the perspective of a market loser and the second a winner.

Make it your business to hold all the Aces


‘I am going to take the view that actually an investor is different to a trader’. Michael Covel goes on to explain that winners trade they don’t invest. Investors put money into assets that they hope will increase in value over time. They rarely have a plan if that investment decreases in value they usually hold on in the hope that the value asset ‘turns around’. ‘Investors’ are usually those that succeed in bull markets (not hard) and lose in bear markets, also not hard unless you have a plan.

Alternatively, a trader has a defined plan to put capital into a market for the sole purpose of generating profit. They know what action to take under any circumstance. Traders don’t care what they own or sell as long as they end up with more money than they started with. They wait for the right opportunities and a trend follower can wait for the right moment when the odds are on his side. The diversified scattergun approach doesn’t work.

Plan to succeed


Then we take a look at the two market theories. The first market theory is fundamental analysis, the study of supply and demand, economic events, earnings ratios, balance sheets and other such matters. One can supposedly then predict changes in market direction before it has been reflected in price with the end belief, they can make money from that knowledge. The vast majority of analysts use fundamental analysis that’s why they held through the major market drops of 1987, 2002-2003,2007-2008. It’s past news the market is well aware of. Did anyone ring on your doorbell to tell you it was coming? They have no clue as to when to exit during these market bubbles. Then there is the constant market drivel generated by the press and the ‘experts’ who are all projecting their various theories on us and we lap it up amazingly because investors crave “cause and effect” explanations and feel safe in the illusion that there is a deeper understanding. Because these ‘theories’ are all different it is no wonder we get confused.

Or we can reject that space totally and look at a totally different second market theory, that of technical, or price analysis. Based on the belief that all known factors affecting supply and demand are reflected by market prices, insider trading included. After all that is the purpose of market prices so let’s not ignore that clue. So instead of looking at fundamental factors we examine the price action itself and that opens up a very effective way of trading for a profit.

But there are different perceptions of what technical analysis is. There are those that read charts and uses indicators to predict market direction and that has connotations of mystery and astrology and in the words of a major equity research house the question is, can past prices predict future performance? Perhaps this question should be worded another way!

But there is another form of technical analysis that has no interest in predicting or forecasting. It is a form of reacting to prices action. Because we know trends occur all the time, and have for centuries, all a trend follower is trying to do is to use price analysis to identify a trend, jump on it, follow it, an get off when it turns – because that’s what they do, repeatedly. This type of technical analysis doesn’t get you in at the top or bottom, you don’t necessarily trade every day or week, and there are no targets to hit or assumed end dates. Just price trends to profit from.

Catch the Wave as it Breaks and ride it in.


Once we have decided whether we are investor or trader, fundamentally or technically based, predictive or reactive, there is one more element we need to decide and that is whether we become a discretionary or mechanical trader. You probably know from my past narratives where I lie but let’s make the distinction. Briefly put a discretionary trader uses his discretion based on behavioural biases and their market knowledge to make buy or sell decisions. Decisions made by a discretionary trader can be subjective, second guessed and changed and to some degree will be tainted by personal biases, and there are many of those.

Alternatively, mechanical trend following traders base their decisions on an objective, automated set of rules. These rules are a combination of market entry signals supported by money management rules that protect capital and ensure profits (trends) are maximised. That’s how you make money. It really is that simple. Does it take the fun out of trading? Yes, it is rigid, it is disciplined, it is about robotically following a set of rules, but trading isn’t about having fun it is about making profits.


An effective rule-based strategy can be defined, quantified, written down, and measured in terms of numbers as a way to track trends.

Fact or Fiction

Trend following trading is reactive by nature. It does not forecast or predict markets or price levels. Prediction is impossible. Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and follows the waves of human behaviour.

Key points that further illuminate the trend following approach

  • No more buy and hold, analysts, or news
  • No prediction
  • The big money of letting profits run
  • Risk management is top priority
  • Takes advantage of mass psychology
  • Scientific approach to trading
  • Strong historical performance in crisis periods