Traders are always trying to improve their game. Beginners usually jump from strategy to strategy in search for some holy grail that will always win no matter what the markets do. Pro traders outguess their gut and their systems in attempts to make or save an extra buck. Such efforts are usually self-correcting by losing money.
I believe we all forget to use common sense from time to time. It’s OK. We are all prone to getting wrapped up in our emotions while trading and just living everyday life. Sometimes, we can lose self-awareness, perspective and ultimately our discipline.
The discipline I use to trade and live my life is Trend-Following. The core principles resonate with me. They feel natural. They feel like good old fashioned common sense. And when you test these principles, you clearly see that they actually work.
In case you may not be familiar with Trend-Following, its principles consist of:
1) Trading with the trend
2) Riding winners
3) Cutting losses
4) Managing risk
5) Sticking to the system
Seems pretty basic, right?
You may be tempted to overlook these basic rules because you may think if they’re so simple then why isn’t everyone doing them? Well, simple and basic aren’t synonyms for easy.
Take dieting for example. Everyone reading this knows what a healthy diet is. If I asked you to design a healthy 7-day meal plan, I bet most of you can do it no problem.
Everyone knows sugar, processed carbs and chemical-infused meat are horrific for your body. Yet how many of us still eat them? “Oh but they just taste so good” you may say. Is that what you plan on telling the doctor or your family when you get sick? Is taste, alone, worth the years you’ll shed off your life by eating them?
In trading, when you’re taking a big loss, do you tell yourself that you just love the stock so much that you can’t imagine selling it? This kind of self-talk is example of your emotions attempting to derail your discipline. Selling the stock is easy. You just click a button or two and it’s done.
What makes selling it difficult is the same emotion that comes up when you walk in front of a doughnut shop. You just can’t help it. Knowing the right thing to do is easy. Actually doing it is difficult.
Success in life and trading requires us to follow certain rules. A Trend-Following philosophy can help you lose weight as much as it can improve investing performance. Trend-Following can be applied to all areas of life.
By design, Trend-Followers stick with what works and cut out everything that does not. They do not waste time over-analyzing or second-guessing their rules. They manage risk according to their tolerance and goals. They don’t get greedy or impatient, but stick with their discipline. Above all, they survive during hard times and thrive during good times.”
Go with the trends my friends.
Mike Melissinos is the founder of Melissinos Trading, a trend-following fund manager. Mike is a trading coach and former D1 athlete. He welcomes your trading questions at [email protected].
*no relevant positions