The Treasure Hunterthey’re going to get in, you’re going to get in with them, and the
Achilles heel of every trend follower is this following sentence: You
cannot pick up a trading book without reading it. In fact, you’ve
heard it all before. To be a good trend follower you’ve got to cut
your losses and let your profits run. In that statement is the Achilles
heel of their trading strategy. They’re going to cut losses, which
means they’re going to take a lot of whipsaws and they’re going
to let their profits ride, which means they’ve got to suffer huge
drawdowns before they get out of their trades. Let’s focus just on
the cut your losses side because that is what is applicable to my
averaging down. What happens is that I’m going to get in with
all the trend followers and you then have the reaction, which is
then going to cause the trend followers to further that reaction by
cutting their losses, which is going to create more pressure on the
down side. At that stage I may relook at this thing and say, “You
know, it still looks like a great asset class, I still want to own this
thing for whatever reason.” I know it’s gone against me, but I have
to commit more capital here. Usually I’ll let it drop two, three, four
days against me, and I’ll wait for it to show that the trend is going
to continue before I pull the trigger again.
Q: You wait for prices to stop going down and going against you?
A: Yes. I’ll give you one example that I use. Technically I’ve
seen and I’ve tested on Trade Station that markets that are in good
uptrends and followed by trend followers, have anywhere from
two-, three-, or four-day price drop correction, which is, in my
mind, a reflection of the trend followers cutting losses. If the trend
is over, this might not apply. But frequently what I’ve found is that
the trend is going to reassert itself. What happens is the market
eventually takes out it’s high the day before and, let’s say, we had a
three-day correction. So you had down moves day one, two, three,
and on day four I’m watching and I’m thinking, “Are they out?
Are they out? Are they out? I don’t know. I don’t know.” I’ve
reevaluated everything. I’ve probably spent hours thinking about
if I’d do this trade again and all of a sudden it takes out yesterday’s
high. At that point, most likely, I’m going to start to execute and