Trend Following is More Than Long-Term
January 1, 2021
January 1, 2021
On the shoulders of Richard Davoud Donchian
Most investors and traders reference Richard Dennis as the father of the Turtle school. While he certainly made it a household name, he was standing on the shoulders of Richard Davoud Donchian, who coined trend following a decade earlier. Today I have had the luxury of building on their working and advancing their rules to a modern-day knowledge base.
Please note from the get-go that the majority of market players attach the meaning of “trend following” to the long-term time frame for the multi-month time horizon investor. In reality, “trend following” is applied to any time frame. Put another way, trends exist for any size bar and for any time frame you want to trade. With that in mind, applying these guidelines is of a robust nature.
- It is not the percent win rate or the frequency of success that matters. The investor/trader needs to know the edge for every trade before he makes it. The point is the magnitude of success that is critical. The size of the potential opportunity is where the Contrary Thinker’s volatility model is used to predict the immediacy of the move and the size. That model is the Technical Event Matrix (TEM).
The old school suggests the calculation of the volatility of the instrument you are trading with the Average True Range. This technique is widely used and highly discounted. Very few people have the code to TEM, and only members have access to the plugins and their signals.
- You need to understand the concept of shorting. It would be best if you were not biased one way or the other on the market but be willing to play both sides as conditions dictate. I find the majority are phobic about the short side, something that one needs to get over if they want to achieve more than average returns.
- Stop worrying about how you enter a trade and focus on the exits; and keep it based on price, not money. Plan before entry where the market tells you the position is wrong and get out of the position. See the strategy page on our member’s blog for strategy exit ideas.
- If you want to make Turtle-type returns that are better than average (Alpha), you need to get comfortable with leverage and pyramiding winners. This is where TEM comes into play because it tells the investor when to expect a period of a forceful trend for the time frame he is trading. See the member’s only blog for the Turtle leveraging strategy for both scalpings to long term positions.
- The old school teaches you to vary your initial position size based on the volatility of the instrument. In contrast, sound risk management is low or no risk. So no matter how high the probability the precondition you only add after the position starts to work in the investors/trader’s favor.
- From a money risk point of view, risk no more than 2% of your account on a given trade is the standard rule of thumb. However, what is critical here is opportunity management before getting into the trade. Assuming it is 5 to 1 or better, you can be clipped four times in a row and hit in the fifth and still make money.
A new page that covers the entry and exit strategies page, based on charts and indicators, will be linked to this page shortly, showing how we control risk and maxes out opportunity.
- Be 100% price based, stay away from the evils of money, the being pulled around by your P&L if you can use a software program to test your strategies and systems. This will give you a better feel for the performance of your methodology.
- There is no fixed portfolio of markets or set account balance that you need to trade. Things change, risk change, and opportunities vary. Plus, each trader is different and should develop their plan according to their temperament and capitalization.
- Instead of watching TV to shape your trading decisions, use the price. Price is the purest form of information that the markets give.
- Remember that all content that is streaming in the public sphere is just that publicly available. There are several problems with it. It is a boom area for sales and marketing and a place for entry-level types to provide entry-level type advisory. Just like the financial news media, understand what it is, and stand above it. For the network news, their down-side is to get the insider interview they are used by the insider to make a market, and 90% plus of social media is inexperienced—a space I curate for a contrary indicator.
I put my name on my work and stand behind it
Great and Many Thanks,
Jack F. Cahn, CMT
Contrary Thinker since 1989,
Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA
92264 USA. 760-459-4681 OR
25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889
— Contrary Thinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.
— Pricing is subject to change without notice. My indicators and strategies can be withdrawn for private use without notice, at any time.
–Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate for your financial situation. Use only risk capital when trading futures or options