Over the years of teaching trend following I have never made it a secret that there are ups and downs. You may get 10 losing trades before you strike it big with the winner. This is where risk management and patience come into play. Consider this clip from one of my Trend Following Radio monologues:
So think about drilling an oil well. You show up in California, back in the day, and you start drilling holes. Now you can go drill randomly, you can just start walking up and down the sides of cliffs and just start drilling randomly. But if you do a little geological homework, maybe you know where to drill to increase your odds. Same thing with trend following. Okay, go with random entries, but what if you can increase your odds with the type of entry signals that give you a little bit more of an edge. I want you to think about the connection between wild-catting, speculating and trend following. The idea is that you’re going to drill a lot of holes and some of them are just gonna be dry. There’s not going to be anything there. But then you are going to hit one and it’s going to be a gusher. No one’s going to remember all those dry wells that were dug. No one’s going to care. That gusher’s going to pay for ’em all and then some. And then everybody will say, “Boy he was a genius he knew exactly where to dig.” No, not really. He just optimized where he was going to drill, he knew a lot of them weren’t going to work out, and then some of them did work out and you got a big homerun. Boom. That’s life.
Started transcribing podcast episodes. Hence a blog post where I excerpt myself.