Trend Following Trading & Turtle Trading

An Introduction to The Best Trading Strategy

What is Trend Following trading? A good definition from Van Tharp:

Let's break down the term Trend Following into its components. The first part is "trend". Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then "follow" it.

Trend Following is reactive and systematic by nature. Trend Following does not forecast or predict markets or price levels. Prediction is impossible!

Trend Following demands that you have strong self-discipline to follow precise rules. It involves a risk management system that uses current market price, equity level in an account and current market volatility. Trend Followers use an initial risk rule that determines your position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, Trend Following trader's average profit per trade is significantly higher than the average loss per trade.

Trend Following is not a Holy Grail. It is not some passing fad or hyped-up secret black box either. Beyond the mere rules, the human element is core to the strategy. It takes discipline and emotional control to stick with Trend Following through the inevitable market ups and downs. Keep in mind though, Trend Followers expect ups and downs. They are planned for in advance.

Trend Following Nuggets of Wisdom

Price: One of the first rules of Trend Following is that price is the main concern. If a market is at 60 and goes to 58, 57, 53 - the market is in a down trend. Despite what every technical indicator might predict, if the trend is down, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.

Money Management: The most critical factor of Trend Following is not the timing of the trade or the indicator, but rather the determination of how much to trade over the course of the trend.

Risk Control: Trend Following is grounded in a system of risk control and money management. The math is straightforward and easy to learn. During periods of higher market volatility, your trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more favorable price trends reappear. Cutting losses is the way to stay in the game.

Rules Rule: Trend Following is nearly 100% systematic. Price and time are pivotal at all times. Trend Following is not based on an analysis of fundamental supply or demand factors. Trend Following does NOT involve seasonals, point and figure, Market Profile, triangles or day trading.

Trend Following answers these critical questions:

How and when to enter the market.

How many contracts or shares to trade at any time.

How much money to risk on each trade.

How to exit the trade if it becomes unprofitable.

How to exit the trade if it becomes profitable.

Conclusions
If you want in-and-out day trading, we can't help. Good Trend Following systems (including the Turtle trading system) average five or six trades per market per year. What do you need to get started?

• An active mind, willingness to learn and passion to win.
  
• No knowledge of what an Italian bond is worth or what companies comprise the S&P or FTSE index. The key is the price on the chart.
  
• Discipline and common sense to do the right thing per all rules.
  
• About an hour each day at the end of the day to check trades.
  
• A PC and telephone line (or internet connection).
  
• Some Turtles Won; Some Lost. Why?

Trading is a zero-sum game. For every winner, there is a loser. What's the difference between winners and losers? Smarts and strategy. For every loser in the NASDAQ implosion there was a winner. Does this mean that there are traders with neither strategy nor smarts actively losing, effectively shifting their funds to the winners, armed with strategy and smarts? Yes, absolutely.


General Rules for Trading Systems

• Understand why you are trading in the markets. Are you seeking a gambling thrill or are you serious about making money?
  
• Use a system and don't deviate from it.
  
• Use money management at all times.
  
• Establish your trading plan before the markets open.
  
• Detail your plan for each trade.
  
• Establish entry and exit points and understand risk reward ratios.
  
• Accept small losses as part of the game if you want to win.
  
• Trade markets from the short side.
  
• Maintain a strong and honest relationship with your broker.
  
• Develop a business plan. Speculation is a business.
  
• Stay the course so you are around for the big moves.
  
• Don't blame the market for your losses. You are the reason for your losses.
  
• Develop a trading plan for each potential situation you may face.
  
• Do not look at quotes during the day.
  
• Do not concentrate on break-even levels when you are losing.
  
• Remember that break-even levels do not impact on the future success of a position.
  
• Don't liquidate a winner to keep a loser.
  
• Develop and maintain an exit plan. Follow this plan with rigid discipline.
  
• Remember that greed kills.
  
• Never add to a losing position. A losing position means you were wrong.
  
• Sustain your patience. Big movements take time to develop.
  
• Remind yourself there is nothing new in the markets.
  
• Don't predetermine your profits.
  
• Avoid techniques you don't understand.
  
• Don't be overly curious about the rationale behind a move.
  
• The key to wealth in trading is simplicity.
  
• Trade money not markets.
  
• Bulls and bears make money, but pigs get slaughtered.

Trend Following Guidelines:

1. Trend Following is not anticipatory. Does the 60% drop in NASDAQ stocks mean the bull market has finally run its course? Who knows. Don't worry about what the markets are going to do, worry about what you are going to do in response to the markets today. You can't undo the past and you can't predict the future. No one can consistently predict anything. Prices, not investors, predict the future.
   
2. Meticulous risk management strategies are absolutely crucial. Everyone makes money in a bull, but if you don't have a money management plan and an exit plan, you are in trouble when the bull is replaced by the bear. Trend Followers plan when they will get out before they ever get in. They are interested in one variable: price. They forget forecasts, fundamental factors, and technological break throughs.
   
3. Successful trading systems adapt to change. Inefficiencies in a variety of financial markets around the world lead to sustained trends. Mechanical trading systems exploit these trends for profits. With global markets in various stages of expansion, retraction and equilibrium, your trading strategy adapts.
   
4. Know every day what your portfolio is worth. Calculate what your risks are on any given day for all positions.
   
5. Controlling risk is not the same thing as avoiding risk. If managing risk is an integral part of your philosophy, when your risk level goes up or down, you simply adjust.
   
6. Manage your risk. Position liquidations are triggered by significant adverse price action and are never pre-determined objectives. Concentrate on managing the risk. The returns will take care of themselves.
   
7. Large profits engender larger size ?thin profits engender cutting back. If you are flush with profits, you trade larger size. If you are thinly capitalized, you have to cut back.
   
8. Equalize risk. Allocate a fixed dollar amount of risk to each new position. For example a corn position will have the same initial dollar risk as a T-Bond position. By trading a system with the same parameters across the board you protect yourself from curve-fitting.
   
9. Enter and exist with rules. You can't expect to enter a market at the precise moment a bottom is hit, nor will you exit a market at the exact top. Capture the middle of the trend.
   
10. Seek profit opportunities in trending markets whether those markets are moving up or down.
    
11. Obtain profits from long-term volatility. View volatility as a cornerstone of your trading system. Volatility is the root of profit.
    
12. Do not attempt to buy lows and sell highs. Buy market strength (highs) and sell market weakness (lows).