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Trading Systems Frequently Asked Questions

Q. Can you offer insight about adding to positions?
A. Richard Dennis offered:

When you have a position with a profit. Anytime the market goes up a reasonable amount, say a strong day’s work, after you’ve put on a position, it’s probably worth adding to that position. I wouldn’t want to wait for a retracement. That is everyone’s favorite technique; to buy something strong that retraces. I don’t see any justification in the statistics for that. When beans are at $8.00 and go to $9.00, if the choice is to buy them at $9.00 or buy them if they retrace to $8.80, I’d rather buy them at $9.00. They may never retrace to $8.80. Statistics would show that you make more money buying them and not waiting for a retracement.

Q. Are real time quotes needed to trade?
A. Richard Donchian offered:

If you trade on a definite trend following loss limiting-method, you can [trade] without taking a great deal of time from your regular business day. Since action is taken only when certain evidence is registered, you can spend a minute or two per [market] in the evening checking up on whether action-taking evidence is apparent, and then in one telephone call in the morning place or change any orders in accord with what is indicated. [Furthermore] a definite method, which at all times includes precise criteria for closing out one’s losing trades promptly, avoids…emotionally unnerving indecision. In other words, you do not need real time quotes to trade successfully. You can use end of day quotes.

Q. Isn’t the accuracy of trade entry important?
A. No. You want to buy when the market is moving up. Period. You never question the accuracy, direction or how long the move will last. What if you have an entry that is 80% accurate, but loses money? Entry accuracy is no Holy Grail. If you find yourself staring at quote monitors all day and watching CNBC to figure out when and what to enter, stop trading.

Q. Why not day trade?
A. How can you compete with floor traders while sitting at a quote monitor far removed from the action? Consider the amount of random movement within any 24 hour time period. With maximum profit limited to only one day and the risk relatively large in relation to realizable profit, how can you possibly win in day trading over the long run?

Q. There is no way to day trade profitably?
A. Jerry Parker offers:

Probably my best technique is not picking up the phone to close out a winning trade. What is left to be said about the futility of day trading? Trend followers know that trading decisions need to be looked at over the very long term. The results of one trade are almost meaningless.

Q. Why is the price so important? Why is it the key?
A. The emotional reactions to trading, hope, fear, guilt, over-confidence, panic, etc., are avoided with trading systems based on price. The personal burden is lifted and trading can become objective when price is the only variable. The price already reflects all other variables filtering out subjective nuances of whomever is offering the information. Focusing on price, to the exclusion of fundamental data such as earnings, crop reports, consumer confidence and market news, allows for a scientific approach to trading.

Q. How do people overuse statistics?
A. Many traders have developed subtle techniques that squeeze information from small amounts of data. If trading results don’t hit you in the head, they are most likely not real. You need robust trading schemes not curve fit academic studies.

Q. Why do you call trend following a robust system?
A. David Druz offers:

  • Robustness is the ability to survive.
  • Robust trading systems are designed to remain valid for years.
  • They rarely exactly fit to any specific market situation.
  • Robust trading systems should ideally trade successfully at all times, in all markets, in all conditions.
  • A robust system is difficult to kill even in bad markets.
  • Short term volatility is inconsequential to trading success.

Q. Is picking the right market crucial?
A. No. Picking the right market alone is not the absolute key to success. Great success relies on money management. Money management determines whether you win in the long run.

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