Positive feedback from Ray N., of the United Kingdom (a loyal reader of TurtleTrader), but… a mistaken view of technical analysis:
Gentlemen, Many thanks for a most interesting website. I’ve been a regular visitor during the last few weeks and have signed up to your newsletter so I can keep up to date with developments. I would say that the recent changes have made the content much easier to navigate. However, having said that, I probably still have a fair amount to get through, such is its depth. My experience of trading has been exclusively in shares of LSE listed companies. I happened upon the tech bubble in 1999 just before total madness took it to the peak of March 2000. After initially holding a losing portfolio, its value more than quadrupled and I managed to sell half at the top. I sold the remainder 6 months later as the falls continued and ultimately ended up with about twice my initial investment. Why didn’t I sell it all? You know why. Buy and hope. I was hooked on the market but could see no sense in trying to re-enter while the falls continued and trading the long side was the only option for a private investor. Since then, I have discovered CFDs and have experimented with short selling. A joy, and when I was trading as a sideline, modestly profitable. However, during the last two weeks I’ve been giving it my full-time attention with the result that I’m losing consistently. The reasons for my losses are obvious, based on what I’ve learned at your site. I do not understand money management. I’ve also noticed that trades held over several days or weeks can be winners, but day trading is a lottery. My consolation is that, overall, my amateurish efforts have still outperformed my pension fund managers! I’m now resolved to return to first principles and learn how to trade properly, over the longer term. I’m 51 and my income from IT contracting is less certain with each year that passes. So, my objectives are to trade profitably so as to remove the uncertainty of freelance employment and to provide security in retirement, something best not left to HMG and my pension fund ‘managers’. One question I have concerns any prerequisite understanding of technical analysis. I gather that the objective of trend following is to identify trends in their early stages and then to apply risk/money management techniques to achieve maximum profitability as the trend runs its course. Once again, thanks for the hype-free website, which I’m returning to as soon as this email is sent!
TurtleTrader comment: There is no technical analysis that is a prerequisite to trend following. There is no additional technical analysis you need in advance or during trading as a trend follower. Trend following fully includes entry criteria. More.
What Ray’s Letter Gets Right and What It Gets Wrong
Ray’s letter is worth reading carefully because it is one of the most honest accounts available of how a retail trader reaches the point of wanting to learn trend following. The tech bubble experience, the failure to sell everything at the top, the buy-and-hope recognition in retrospect, the discovery of short selling through CFDs, the switch to full-time trading producing consistent losses, and the self-diagnosis of not understanding money management: this is the path most retail traders travel before finding systematic approaches.
The specific observation that “trades held over several days or weeks can be winners, but day trading is a lottery” is the empirical discovery that many retail traders make independently. Day trading fails for the same reason the hospital with 12 babies per day produces more extreme deviations: small samples are noisier. A single day’s price movement is mostly noise relative to the signal that a multi-week trend represents. The trader who switches from day trading to holding positions over weeks or months is not changing their analysis. They are changing their relationship to market noise by extending their time horizon beyond the horizon where noise dominates.
The mistaken view about technical analysis prerequisites reflects a common misunderstanding of what trend following is. Ray assumes that trend following is a form of technical analysis, and therefore that one must first learn technical analysis in order to apply trend following. The TurtleTrader comment corrects this directly: trend following fully includes entry criteria. The entry signal, whether a 20-day breakout or a moving average crossover, is built into the system. The trader does not need to study charts independently and identify trend beginnings using separate technical analysis skills. The system fires when the defined condition is met. The condition is the technical analysis, already incorporated into the rules.
The additional indicators, oscillators, and chart patterns that fill technical analysis textbooks are the extra analysis that trend following explicitly does not require and generally does not benefit from. They add complexity, introduce subjectivity, and create the conditions for the second-guessing that systematic rules are designed to prevent. The system’s entry criteria are sufficient. Additional technical analysis on top of them does not improve the entry. It introduces the human judgment that the system was built to remove.
Frequently Asked Questions
Do you need to know technical analysis before learning trend following?
No. Trend following fully incorporates entry criteria within its system rules. The breakout signal, the moving average crossover, or whichever price-based condition the system uses as its entry trigger is part of the system. The trader does not need separate technical analysis skills to identify trend beginnings because the system’s entry rule does that automatically when the defined condition is met. Learning additional technical analysis outside the system adds complexity without improving performance.
Why does day trading produce consistent losses while longer-term trades can win?
Because short-term price movement is dominated by noise rather than signal. The information content of a single day’s price change relative to a sustained multi-week trend is the same as the information content of a single coin flip relative to a sustained series of outcomes. Small samples deviate from their expected distribution more frequently. The trader who holds positions over weeks or months is trading in the time frame where the trend signal exceeds the noise. The day trader is competing in the time frame where noise dominates and transaction costs erode whatever edge might theoretically exist.
What is the most important lesson from Ray’s tech bubble experience?
That “buy and hope” is not a selling strategy. Ray correctly identified the bubble’s peak and sold half, but held the remainder out of hope that prices would recover. The systematic lesson is that the exit rule must be defined before entry, when the portfolio was established, not at the moment when selling feels wrong because prices have already fallen. A trailing stop on the full position would have captured more of the quadrupling move and exited automatically when the trend reversed, without requiring the real-time judgment that produced the “you know why” recognition in retrospect.
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