Trading Strategy Guide for New Trend Followers

One of the keys to being a successful trend follower is not only understanding how the market works, but also understanding your own personality. People don’t readily step out of their comfort zone, especially when it involves money.

  • Matthias Hagemann
    Matthias Hagemann
  • Trading Psychology

  • Updated October 16th 2020

Biggest obstacle for new trend followers

I’ve started trend following in 2007 and do it rather consistently since 2011. I claim to know a thing or two about personality traits that tend to succeed in this business.

Lack of a growth mindset is a primary reason why many students never make a dime in the stock market. No one would allow the possibility of not having a growth mindset, but learning how to successfully put your capital to work takes time until objective thinking and methodic execution permeates every step of their trading process.

These skills are necessary to develop the self-control and perseverance required to generate a positive outcome in the long term. These features are commonly known as the ‘discipline’ of a market participant. But if there is little will to stick to a proven system and to improve ones discipline, chances are too slim to ever achieve that goal.

A drawdown is regarded as a threat to one’s ego instead of a normal occurrence and an opportunity to improve the system. To make matters worse, the market participant throws the original trading plan out the window and ventures on a series of opportunistic decisions, almost completely erasing the chance to recover from the drawdown.

In order to develop a weathered out trend following system that improves with each crisis, you have to be aware that you will be the biggest obstacle to your own success. Only a growth mindset will be tuned towards a learning process that will yield consistent returns for years to come.

Start humble and stay alert

Arrogantly imposing your views on the market is inevitably doomed to fail. Almost every aspiring trader overestimates their chance of success. They read success stories on Reddit or of their friends and start off overly confident. Instead of venturing out on a journey of self-discovery and developing the skills to observe and reflectively test out strategies, they throw in the towel with the first failed trade.

Trend following is a skill that you have to learn in a progressive but humble way. It is not a skill you are born with. The same market that brings you to the promised land will bring you to your knees first.

When you follow a trading plan that captures the reality of the market and you stick to it, you will see the results. If something doesn’t work out, you have to face that fact in order to find the mistakes in your approach and try anew. The ones who make it are the ones that always stay focused, keep an open mind and consistently work to improve themselves.

Keeping a trend following system simple allows a trend follower to keep his focus and motivation in check. Trend following strategies are overdone by many in the industry who forget to keep it as simple as possible. You can complicate trading very quickly and before you know it, you can be looking at 20 screens and 80 different colors.

People seek shortcuts and immediate gratifications

Trend followers take the slow path. Too many shortcuts are taken in the very beginning of trading careers, which causes a rift in the clear understanding of market principles and concepts. This is why many beginning traders try to take the easy way out and look for trading gurus or a trading software with ‘proprietary indicators’.

In order to learn a new skill, a good foundation has to be built first. Automated software is aimed at making everyone think that knowledge about the market isn’t needed.

There is no substitute for screen time spent while observing and trading the market, as it builds the necessary patience in the actual environment where you will be placing your trades in. You will not develop the knowledge needed to be competitive in several markets using a semiautomatic or automatic trading program.

Look for a curriculum offering a strategic rule-based approach. The discipline gained learning this trade makes a difference that will be notable in your account statements.

The person who teaches you the most is you

If you have a losing trade, study it. Note down your thought-process before, during and after the trade. You should prepare a checklist that you run through in order to ensure that you will always follow the same rules with every trade.

Then you can identify the potential for improvement. If you have rules and the rules need adjusting, that’s helpful insight which will spur progress. If there weren’t any rules in the first place, nothing can be learned or improved. You have needlessly wasted money. Was it a trade that could have been avoided or was it taken hastily?

This is one of the most important aspects of trading: If you do not spend the time learning from your mistakes, you are sure to repeat them in the future. Trades that run against your initial assumption happen to everyone.

The difference between those who make it and those who don’t is that successful traders limit mistakes they make repeatedly.

Simplicity is the way forward

A significant leap forward to me was the elimination of practically all indicators after realizing that they didn’t contribute positively at all. They rather contributed negatively by contradicting each other and causing constant analysis paralysis. Many great opportunities have passed by me that where so obvious in price action, but were prevented due to inconsistent signals from indicators.

What I teach students is the ability to read and understand the market. Once we really understand how the market moves, and why the market moves the way it does, indicators become secondary and the market becomes the primary thing we pay attention to. It’s the market that we are trading after all, not indicators.

The single most important thing that you can master is price action. There is no software, indicator, or trading guru that can take that away from you. The old adage is true, ”Give a man a fish and feed him for one night; teach a man to fish and feed him for a lifetime”.

Indicators are always lagging which means that they are calculating market movements in a delay. Make sure to focus on price action and learn how to read the market.

Matthias Hagemann
Matthias Hagemann
Matthias’s career spans over a series of financial institutions. Trend following became a focus topic when he wrote his senior thesis on “The Psychology of Financial Markets”. He is portfolio manager at Hagemann Capital, a high-conviction investment fund.

Trading Psychology

Fortunes are not generated with our brains but with our stomachs. Trading psychology is an overlooked area and you will make significantly better trend following decisions when your own psyche is well-understood.
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