Rumours of Trend Following's Death are Greatly Exaggerated

Last October when trend following giant, John Henry, decided to close up shop, there were rumours circulating that perhaps trend following as a strategy was dead.

I distinctly remember corresponding with another trend following trader, from England, saying that if I had to guess, this event may act as a contrarian signal that would lead to large gains for trend followers, similar to 2008.

And since last November, there are have indeed been some truly extraordinary trends in a wide variety of markets.   Using my quadruple moving average system,  the foundation of all of my charts, would have generated some clear, objective and profitable trading signals.    Below are a few examples:

The chart above shows the Russell 2000.  A buy signal was generated near the beginning of December and, since then, the index has blasted higher, much to the frustration and embarrassment of the vast majority of other bloggers out there who have tried to call a top in this market.

The great thing about being a top picker is that you will always end up being right, eventually. The downside, however, is that tend they to lose money over the long run, which is likely why they have to resort to selling newsletters, or cover their website with annoying ads,  whereas trend following traders just tend to trade, in silence.

Next, we have a chart of the Japanese Yen.  A black and white, unambiguous, objective sell signal was generated in mid-October.

Thirdly, a sell signal was generated in gold near the beginning of December.   Since then, gold was simply not buyable for me and I have forgotten about the metal, deploying my capital in more productive areas.

To the chagrin of gold bugs, "doomers", and perma-bears, precious metals stocks have completely collapsed, with junior gold stocks down 73% since the top.   Meanwhile, a trend following trader could have exited the market in an objective, emotionless manner before any serious damage occurred.

Three More Stocks Breaking Out

With the Dow where it is, it's not difficult to find new stocks breaking out.    Here are 3 high potential stocks that are making new all time highs, yet exhibit excellent pattern pressure and that, I think, have potential for a lot more upside:

Because I try, as often as possible, to put my money where my mouth is, I do now own these 3 stocks.   And they replace 3 older positions that were either weak, or were showing signs of relative weakness.

Learning from Old Traders, not Bold Traders

I mentioned a few weeks ago that a major problem with books written on trading is that, in general, they are not written by successful traders.   Often, these books prove to me what doesn't work, which is moderately helpful, since this process will eventually lead to what does work.

However, if you want to cut to the chase, here is a suggestion:  study, learn from old traders.  The way I see it, if a trader has been trading for say, 25 years, he's doing something right.   Furthermore, old traders are more likely to have become successful through skill, rather than luck.   Anybody can put together an amazing one year track record (even me), but it's the truly skillful traders that deliver results decade over decade.

So, in this post, I've assembled some resources that I have found insightful from five old traders that I've personally learned a lot from:

1) Peter L. Brandt

Trading experience: 33 years

Website: Yes

Book:  Diary of a Professional Commodity Trader

Other:  Podcast, Podcast 2

2) William Eckhardt

Trading Experience: 40 years+

Website: Limited

Book: None, but profiled in The New Market Wizards

Other:  Month by month track record

3) Larry Hite

 Trading Experience: 40 years+

Website: Limited

Book: None, but profiled in Market Wizards and Trend Following

Other:  Limited - YouTube Clip

4) Ed Seykota:

Trading Experience: 40 years+

Website: Yes

Book: Yes, but out of print;  profiled in Market Wizards

Other:  Limited - YouTube Clip

5) Nick Radge

Trading Experience: 25 years+

Website:  Yes

Book:  Unholy Grails

Other: Podcast;  YouTube Video

Now, finally, here are some commonalities that I have identified amongst these five traders:

• They have a strong emphasis on risk management.   All of these traders don't risk much more than 2% of their capital on each trade.   What happens if you don't follow this rule?   You'll blow up eventually, and you will not become an old trader.   

• They all trade in the direction of the trend.  Even Peter Brandt, who technically is not a trend follower, does appear to trade in the direction of the trend most of the time, and is a self described "buyer of strength" and a buyer of "new 13 week highs". 

• They don't forecast the market.   These five men have over 150 years of combined trading experience and they don't where the market is going next.   If they can't do it, how likely is that you can read a book on indicators, candlestick patterns, or go visit some blog out there that will "call" the market and base your success on that? 

High Potential Stocks of the Week

After running my scans this weekend, here are a few stocks that I found:

Second:

Lastly, I continue to like (and own) the stock WDAY.    In what is a subtle, yet powerful pattern, I count 8 higher lows since November.   That combined with a fresh all time high makes for a very bullish chart, in my opinion:

Buying Stocks at New Highs

Since I will be doing some traveling soon, I had to run my scans today rather than on the weekend.  So, here are 2 stocks that are looking strong right now:

Second: