Tim Arnold's Trading Blox software is one of the few software trading packages that traders actually use to accurately test technical trading concepts. While not as well known as many more popular packages, Trading Blox has a dedicated and loyal following. If you can imagine a trading idea, there is a good chance you will be able to "write" it into Trading Blox and backtest your idea. For more information see: www.tradingblox.com.

This excerpt is from Chuck LeBeau. Chuck happens to be one of the pioneers in the field of trading systems. His wisdom should be absorbed by all:

[This] happens to be a true story, ...

There's something very reductive about the stock market. You can be right for the wrong reasons or wrong for the right reasons, but to the market, you're just plain right or wrong.

John Allen Paulos

Are you comfortable with the concept of right and wrong? The price you analyze everyday is the truth. Price does not lie. The price is always right.

Taking price a step further we can see...

Markets are also the same because of price. All markets are most directly measured by their individual price movements. What do cotton, crude oil, Cisco, SUN, GE, US Dollar, Australian Dollar, soybeans, wheat, Microsoft, JDS Uniphase, EMC and Oracle all have in common? Let's say you know nothing about trading cotton. Moreover, you also know nothing about fiber optic networking (a specialty of JDS Uniphase). Oracle and databases? Let's say you are clueless about them as well. Does it matter that the fundamentals of cotton, JDSU and ORCL are all different? What if you just analyze their market prices?

Trend Following does not require an understanding of the market fundamentals. Take the price data and apply your rules. If your trading is pure trend following, all markets are the same in terms of price analysis.

The Universal Chart

William F. Sharpe
Reprinted from The Financial Analysts' Journal Vol. 32, No. 4, July/August 1976. p. 4, Copyright 1976, Association for Investment Management and Research, Charlottesville, VA
Some years ago, in a land ...

When most people first start trading they often start small. As they get better at it, they trade more. They might start with one contract and then move to ten contracts. As time progresses, they reach a certain comfort level with their trading, but are still afraid to take risks beyond that ...

Consider the following table:

Loss of capital (%)

Gain to recover (%)

5
...

Trend Followers know the trick of letting their profits run is key to trading. Once you learn that to maximize your profits you must be willing to give up some part of your accumulated profits, you are on your way to sustained success. For example, let's say you start with $50,000. The market takes off and your account swells to $80,000. Many people might quickly pull their $30,000 profit off the table. They feel that if they don't take those profits immediately, they will disappear. Refusing to give up a part of that accumulated income due to fear is their big mistake.

Trend Followers understand the nature of the market. They realize that a $50,000 account may go to $80,000, back to $55,000, back up to $90,000, and from there, perhaps, all the way up to $200,000. See the mistake of quickly taking a profit just because you might not like volatility? Those people who took profits at $80,000 were not around to take the ride up to a $200,000 account. Pretend you are one of those people with the $30,000 gain in your account. Instead of simply protecting your entire $30,000 profit, why not be more aggressive with it? Do you think great traders have been successful by taking profits? Or have they compounded their profits?

Letting profits run is tough psychologically. It's counter-intuitive for most people. It feels risky. But, once you understand that in trying to protect every penny of your profit, you actually prevent yourself from making a bigger profit, you have learned an important reason why Trend Followers are so successful.

Money Management

Quick! Volatility is changing. What move do you make?

What direction do you take now?

Trend Following traders use a philosophy of trading that adapts to different markets and ...

Jim DiMaria learned an important trading principle in the less lucrative arena of baseball statistics: The players who score the most runs are home run hitters, not those with consistent batting records. It's the same with trading, DiMaria ...

Q. Is trend following obsolete because markets are different now?
A. Trends in financial markets have been strong for the last hundred years. But are markets different now? After researching the question at the National Agriculture Research Library in Maryland, TurtleTrader discovered that the number of trends in currencies, bonds, grains and stocks in the 1800's were approximately the same as the number today. Moreover, the trends have always been random and unpredictable. That's why the key to trend following will always be reaction to market movement not prediction.

Q. Why is Trend Following successful?
A. Trend Following is a measure of market psychology. Trends, like epidemics, build in geometric progressions. Some people jump on the bandwagon; some get in early either by chance or luck; others get inside information about the fundamentals. Finally there is a critical mass that makes it possible for even more people to simply hear about the trend and get on board. If you design a strategy to take advantage of this basic human behavior, you can apply the psychology to a broad range of markets from cotton to currencies to stocks, and win. This is a key to Trend Following.

To be successful in the trading game, find a sound strategy and then learn and understand the rules of your strategy. Most investors don't want to work that hard. They don’t want to know how Trend Following turns their mindless approach to trading upside down. It can be hard to change old ways or learn new methods, but it's worse to continue losing money with no strategy at all. However, if you learn Trend Following, you will wonder why you ever listened to a broker's tip or watched TV for tips.