I found this untitled document PDF buried in Google. It does make some very good points regarding trading psychology. However, I am not on board with their desire to find “fair value” (whatever that means!), but the simple old school “basics” are nice reminders.
The “fair value” caveat is important. Any document, however useful, that suggests the objective is to find the level at which a security trades at its intrinsic or fair value is describing a different activity than trend following. Fair value requires a fundamental model, a judgment about earnings, assets, competitive position, and future cash flows. Trend following requires none of that. The price is the only input. The price is also the only output that matters.
The old school basics the document covers are valuable precisely because they predate the complexity that has been layered onto investment education over the past decades. The fundamental psychological truths of trading, that losses must be cut, that overconfidence is dangerous, that most active strategies produce worse results than their practitioners believe, that the market does not owe you anything, did not need academic behavioral finance to be discovered. Practitioners knew them empirically long before the research confirmed them. The basics are basic because they are true.
The specific pointer that “many worthwhile trading concepts are available, but none of them will always make money, and an effective trading concept does not have to be difficult, but it must be executable” captures the core of what makes a trading approach viable. Not complexity. Not sophistication. Executability. A system that the trader cannot follow consistently is not a system. A system that requires processing more information than any human can reliably process is not executable under real market conditions. The trend following approach, following price with defined entry and exit rules, is executable. The trader knows exactly what to do in every situation. The system does not require perfect market knowledge, flawless fundamental analysis, or superior information. It requires discipline and the rules.
For more on the psychology fundamentals that separate successful traders from unsuccessful ones, see the mental edge page and the broader discussion of investor psychology across the site.
Frequently Asked Questions
Why is “fair value” irrelevant to trend following?
Because trend following uses price as its only input and makes no judgment about whether that price is above or below any fundamental measure of value. Fair value requires a model of what a security should be worth. Trend following requires only knowing what it currently costs and which direction it is moving. The approach enters when price moves in a defined direction and exits when the rules say to exit, without any reference to whether the price is justified by underlying fundamentals.
What are the “old school basics” of trading psychology?
The basics that have been understood by practitioners for decades regardless of whether they appeared in academic research: cut losses quickly, let winners run, do not overtrade, avoid overconfidence, recognize that no approach always works, and focus on process rather than on individual outcomes. These principles are old school not because they are outdated but because they are correct, and their correctness has been confirmed repeatedly by the performance records of traders who followed them and the failures of traders who did not.
Why must an effective trading concept be executable above all else?
Because a trading concept that cannot be consistently executed under real market conditions is not a trading approach. It is a theory. Execution requires that the rules be clear, objective, and applicable without interpretation at the moment of decision. A trader who must make a fresh judgment call at each entry and exit will make those calls inconsistently under emotional pressure. A trader following defined rules makes consistent decisions regardless of psychological state, because the rules were designed when the mind was clear.
Trend Following Systems
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