LS Trader: Mid Week Update

As all subscribers are no doubt aware this week has been a rough week as was last week. I will not be condescending and say that it does not matter because it does it's just that as I have said many times before we have to look at a longer term view on the progress of the system.

Around a year ago or so when we had a nasty losing period in our record year, one of our long term members sent me an email with the title Argmageddon due to a lot of trends reversing at the same time and us taking some losses. I replied to him that in time things would return to normal and we would make new highs again before the end of the year. Obviously this and much more happened last year and I have every reason to believe that we will recover and get back to profits.

As for when this will happen nobody knows but we are actually not that bad off right now, the system is down for 2009 but it only looks like a couple of percent to me(I have not as yet crunched the figures but this is from looking at my own account which is virtually identical to the computer model as I trade every signal). Obviously this is a long way off the 30%+ gains we had a week or so ago but that is the nature of trading.

The markets are very volatile as you know and we are in unusual times. I still have this as a bear market rally and it's easy to say in hindsight that we could have had tighter stops etc. But that is not how the system works and is not the way to make money trading. The markets could just as easily have continued to trend down and bring in gains for us. This time they went against us but overall you have to do the right thing to be long term profitable and that means sometimes given back some or all of our profits on a trade in order to extract the maximum possible from each trade and giving the trend a chance to continue.

All traders have what I call immediacy bias in that they are more concerned with the trades that are in front of them now rather than looking at what is the right way to trade and what will be profitable in the long run. The trades we have in front of us now are a small part of the puzzle. I estimate that we will make around 200 trades this year alone and what we have to look at is the balance of what they will do as a whole, not a snapshot of a handful or so trades.

I remember Richard Dennis of the turtle legend(Dennis turned around $400 in $20million in around 18 years using his trend following system) saying that nobody wants to buy(invest their money with them) them when they are at a low point(this is when he was managing funds for the public). He said that human nature is for people to quit when the going gets tough and that it was actually the best time to get involved with them as their system had a long term positive expectancy and that before long things would recover and the system would go on to make new highs.

Our system is also a trend following system and does have some similarities to Richard Dennis’ original trading system and our expectancy for the system is the same. No trading methodology is immune from losses and losing periods and that includes our system. What counts is the systems performance over a period of time such as a year or so and not a couple of weeks. As I have said before, only around 40% of the time do the markets trend which means we can expect 7 months or so out of the year to be losing periods so there is nothing new here. A few very good trends can right any wrongs in a fairly short time and often the bulk of our gains can come in a short 2 month period. We just have to wait and see when that will be.

What I would say is keep the faith. The system has a long term positive expectancy and nothing in that has changed. The markets are the same now as they always have been in that they are always changing but at the end of the day markets are run primarily by the human emotions of greed and fear as they always have been and by and large people do not change. This means that what has worked in the past will almost certainly continue to work in the future so the best we can do is continue with what we know works and wait for our time.

Kind Regards

Robert Stewart