Highlight on Trend commandments books

"the successful trader has to be willing to separate from the crowd—to be a contrarian—even though you might always have a strong emotional urge to stay with the group"

"People dislike losses so much that they will make nonstop irrational decisions in vain attempts to avoid the pain. This explains why traders, for example, sell winners too early but hold on to losers too long. It is human nature to take profit from a winner quickly on the assumption that it will not last for long, but stick with a loser in the hope it will bounce back"

"A sunk cost is a cost incurred you cannot retrieve. Although sunk costs should not affect your current decisions, people have a tough time leaving the past. Some will buy more of a losing stock just because of their initial decision to buy it. You can say proudly, “I bought on a discount!” or “I got it cheap.” Of course, if that stock goes to zero, your theory dies"

"What are some additional behaviors that virtually guarantee losses in the markets?"

"Average intelligence is enough. Beyond that, emotional makeup is more important"

"Some of the factors that will influence how well you do in life include self-awareness, self-discipline, intuition, empathy, and an ability to enter the flow. These traits are particularly useful for garnering profits from the markets. Yet many stay preoccupied on other facets of trading, even when leaving the mental part out is guaranteed long-term failure"

"That means you commit to patience and faith in a trading system that is not structured on quarterly reporting or some other artificial measure of the masses (read: sheep). You work hard to gain experience and knowledge. You commit to thinking and planning for the long term. Don’t worry too much about the dollar amount in your paycheck from the man. Do not live by the herd’s standard of salary success—those usually suck."

"simply reading trading philosophies and rules alone will not make you hungry. If you do not want to win, if you do not have it in your makeup, or if you cannot figure out how to put it into your makeup, you will lose."

"Everyone wants the big leagues and the big money, but are you committed to making it happen with relentless and spirited determination?"

"If you put trend following into a baseball analogy you would ask: Do you want to play ball or do you not want to play ball? The pitch is coming across the plate. Decide now whether you will swing the bat. When the pitch comes, if it is your pitch, swing the bat. You want to wait for more information before you swing? No time. In an uncertain world, if you wait until the data is clear or until the ball has crossed the plate, you will miss the pitch"

"The principle of a fast and frugal heuristic is about using the minimum amount of time, knowledge, and computation to make adaptive choices in real life."

"Do not believe in anything simply because you heard it. Do not believe in anything simply because it is rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it."

"Trend followers essentially operate scientific research labs. Their research materials are financial data. The financial markets are their laboratory."

"Trend following’s nature of riding a trend to the end when it bends, and then cutting losses very fast, puts you in a position to benefit when the next unexpected flood rolls in."

"Trend following’s alpha comes from letting winners run on the right-hand side of a fat tail and cutting losses short on the left-hand side. Eliminating losing positions and holding onto profitable positions puts you in the big game hunt for positive outliers.3 A normal distribution is simply worse than useless as a risk management tool.4"

"The likelihood is higher in the smaller hospital. Why? Because the probability of a random deviation from the population mean decreases with an increase in sample size."

"Buy and hold did nothing from December 1972 through March 1980. Your golden years happened during the 1970s—tough luck. "

"No one knows if there is a current bubble in stocks, but it is amazing that some people think they know. "

"You got to know when
　　to hold ’em, know when to fold ’em,
　　know when to walk away
　　and know when to run.

　　You never count your money
　　when you’re sittin’ at the table.

　　There’ll be time enough
　　for countin’ when the
　　dealing’s done."

"Once you become a trend follower, points like those will illicit an occasional soft smile from you, but you will never click again as you will know there is no “there there” behind the link, so to speak."

"Most traders don’t think about how much to buy or how much to sell. They only worry about when to buy and rarely think about when to sell. That thought process is very hard to break for a mass trend following conversion."

"Examining only price action is clearly a kind of primitive attempt. The analogy I think of is in trying to explain the movement of oceanic water. Examining nothing other than the surface phenomena of price action is analogous to looking at surface wave movements only—where the wind explains some part of the movement. Now what might really be moving bodies of water requires a fundamental model—for example, how gravity, the moon, ocean floor structure, temperature might explain the movement of oceanic water mass."

"Trend followers react to market movements. It is critical distinction best seen in the words of trend follower Bill Dunn:

　　“We don’t make market predictions. We just ride the bucking bronco.”"

"There are people making money in the markets through skill. They’re just not writing papers about it"

"These are not easy. Society is not organized to encourage and celebrate the unproven striver. It is much safer to beat up the new thought or heap scorn upon it. Too many young minds are encouraged to take a safe path. Years ago, this was solid advice. Today, this is awful advice. It is shortsighted"

"If you almost get eliminated, two wonderful things can happen. One, you know you can handle the pressure, and you don’t worry about it anymore. And two, you feel like it’s your destiny to win. I don’t believe in destiny, but I believe in believing in destiny. What I mean is that a team that believes in its destiny is more likely to win. We’re all surprised that those guys...are in the Final Four. But they don’t seem surprised, and maybe that helps explain why they are [there].”"

"When you walk into the room, if you don’t know who the mark is—you are the mark.3"

"No one is going to know or care about your failures. All you have to do is learn from them because all that matters is that you get it right once. Then everyone can tell you how lucky you were."

"Every bet you make with your money involves a decision to risk something of value, time, money, or emotional involvement for an uncertain prospect of gain.

　　Placing winning bets over the long run requires constant decisions in the face of innumerable trade-offs.

　　That is life and the trend following life."

"trend following at this meta-level can certainly become complex, still its essential elements can be simply stated. They are three: 1) To initiate positions based on the perceived direction of the trend, 2) To hold positions based on the perceived direction of the trend, and 3) To liquidate positions based on the perceived direction of the trend"

"There is also possibly a fourth thing, as suggested above: It is to do all of these things systematically, on the basis of logical relationships or mathematical formulations. But I do not think that this is an absolute requirement. It is certainly possible to be a subjective trend follower, or to combine systematic and subjective elements in a trend following system. In fact, I believe that some great traders did indeed include subjective elements in their methodologies. Here, however, I will focus on the systematic aspect."

"the systematic nature of trend following can be simply stated. Generally (though not invariably), trend following systems look for their implementation only at the movement of prices. The basic perception is that if a market’s price is going to make an exceptional move in one direction or another, it will first make a moderate move in that direction, leading to the conclusion that if an initiation can be made at that moderate level, the remaining portion of the trend can be followed for a significant period of time thereafter and liquidated at a profit."

"You can say something about a part of trend following. Specifically, of the three elements of trend following mentioned above—initiation, holding, and liquidation—it is the middle part, staying with the trend, that has had a reasonably long pedigree. A number of the speculators and plungers of the past, when asked about their trading strategies, said that they held on to their positions as long as possible, i.e., they stayed with the trend"

" “Cut short your losses; let your profits run on.”"

"As long as the trade is going your way, don’t get out."

"Most of my success has been due to my hanging on while my profits mounted. There is the big secret. Do with it what you will."

"the big money is not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend."

"It’s a bull market, you know."

"Significantly, none of these writers records the use of any meaningful systematic trend following methodology, although Fowler does give an example of Pat Hearne, who added to his position every time the price of his stock went up by one percent, and sold out entirely when it went down one percent."

"I would argue that the technical approach to trading, including trend following, came about not by design, but by necessity."

"Dow Theory is certainly the grandfather of trend following methodologies"

"Edwards and Magee’s book Technical Analysis of Stock Trends,"

"Profits are made by capitalizing on up or down trends, by following them until they are reversed."

"breakout” trader, at one point describing a stock that was bouncing back and forth between two price levels, but observing that eventually either buying or selling would become stronger, and “the price will break through the old barrier."

"This breakout, then, would define the “line of least resistance.” Later, he says, “Well, when the price line of least resistance is established I follow it.”"

"Note that the verb “follow” has become the present participle “following”—an important conceptual necessity (though not the final one), I believe, in solidifying the idea of trend following as a continuing or recurring action."

"George Soros’s reflexivity:

　　“Thus a movement of the stock market once under way generates unrealistic optimism or pessimism, so that the trend of prices then carries through and beyond some point of central value. After that, turned by profit takers or bargain hunters, with the basic forces of supply and demand altered, the market pendulum starts back and passes again through and beyond a point of reasonable value, wherever it may be. Therefore, the chances are worth considering that once a trend has reversed itself to some measured extent (as determined by the Dow Theory, or by the penetration of a moving average or trend line), the new trend will continue far enough to make it worth following.”"

"He had a knack for verbal innovation, including the invention of terms such as “trap forecasting” and “continuous forecasting,” used to distinguish between those trades designed to capture quick profits (“catching the market in a trap”) and those with an indefinite duration whose exit levels were determined on a day-to-day basis, depending on market action."

"then “continuous forecasting” takes over until the next “trap” (to liquidate or perhaps reverse) is signaled. "

"We think that forecasting should be thought of in the light of measuring the direction of today’s trend and then turning to the Law of Inertia (momentum) for assurance that probabilities favor the continuation of that trend for an unknown period of time into the future. This is trend following, and it does not require us to don the garment of the mystic and look into the crystal balls of the future."

"Let us believe that it is possible to profit through economic changes by following today’s trend, as it is revealed statistically day-by-day, week-by-week, or month-by-month. In doing this we should entertain no preconceived notions as to whether business is going to boom or bust, or whether the Dow-Jones Industrial Average is going to 500 or 50. We will merely chart our course and steer our ship in the direction of the prevailing wind. When the economic weather changes, we will change our course with it and will not try to forecast the future time or place at which the wind will change."

"Every good trend-following method should automatically limit the loss on any position, long or short, without limiting the gain. Whenever a trend, once established, reverses quickly, there is always a point, not far above or below the extreme reached prior to the reversal, at which evidence of a trend in the opposite direction is given. At that point any position held in the direction of the original trend should be reversed—or at least closed out—at a limited loss. Profits are not limited because whenever a trend, once established, continues in a sustained fashion without giving any evidence of trend reversal, the trend-following principle requires that a market position be maintained as long as the trend continues."

"everyone remains under the influence of these pioneers of trend following, whether people know it or not"

"For your associates, friends, and family—some bullet point ways to describe and explain systematic trend following trading"

"Be the casino, not the hapless player. "

"Q. Do you expect to make money in
　　both good markets and bad?

　　A. There are not good
　　or bad markets.
　　There are up or down markets."

"In that spirit, these are some of my favorite money-making gems pulled from the historical wisdom of trend trading pioneers Richard Donchian, William Dunnigan, Amos Hostetter, Jesse Livermore, Roy Longstreet, and Dickson Watts:"

"Note: Shout to Ritholtz.com for the Fowler find."

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