Breakout Hype: Trend Following Gone Wrong

“There are many, many financial sites on the Web that let you track a portfolio of stocks on a glorified watch list. You enter in your open positions and you get a snapshot, or better yet a live, real-time update, of the status of your stocks based on the site’s most recently avail-able prices. Some sites, like Fidelity?s, provide tools that tell you how your portfolio is allocated among various asset classes such as stocks, mutual funds, bonds and cash. While such sites get at the idea of money or portfolio management, the overwhelming majority fail to provide the tools required to answer the central question of money management: When I make a trade, how much do I trade? (Try and find the topic of money management on the Motley Fool site.)”
Gibbons Burke

“It is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring.”
Carl Sagan

If you believe trend following is simply buying or selling a 20 day breakout, you are dead wrong. If you focus on breakouts as a Holy Grail, you’ve missed the point and are probably already on your way to losing your capital and, ultimately, your shirt. A trader who focuses on market entry only is in big trouble. Good trading is mostly money management or risk management. Keep in mind though, once you have the money management down, trading is 100% your personal discipline and psychology.

What are some core issues of trend following?

  • How to exit the market.
  • How much to buy or sell at any given time for any market position.
  • How to adjust portfolio during a winning streak.
  • How to adjust portfolio during a losing streak.
  • How to use risk management to ensure you don’t blow out.
  • How to take a loss to avoid larger losses.
  • How to trade both long and short positions.
  • How to balance long and short positions.
  • How to handle accumulated new profits.
  • How to handle stops.
  • How to adjust stops.
  • How to account for volatility.
  • How to prepare for unforeseen large scale trends.
  • How to handle or not handle profit targets.
  • How to view risk of ruin.
  • How to handle entry and exit filters.
  • How to handle psychological and discipline adjustments.
  • How to use money management.
  • How to handle bet size for each trade.
  • How to determine the exact amount for each trade.

After six years we still hear from people who believe a trend following system is simply another indicator, and that’s it. We’re here to teach them why they’re wrong, but only if they want to learn.

Yahoo Finance and CBS MarketWatch

Go to Yahoo or MarketWatch. Check out the quick technical studies you can apply for free. What good are these free services? No good at all. None. If you try to use these services with their abundance of Holy Grail indicators, you will lose your money.

Trend Following Products

Review trend following systems and training:

Michael Covel Trend Following Products
Michael Covel Trend Following Products