19 Aug The Greatest Methodology of All Time (Step 1)
The Greatest Methodology of All Time (Step 1)
Aug. 19, 2020
A very popular question is: If you had to start from the beginning, what would you trade?
It’s a great question because the answer is compelling.
Answering it gets right to the point. It’s easy to try things when you already have a lot of money and success. If everything was gone, though, and you had to start again tomorrow, there’d be no messing around. You’d have to pick the most important thing first.
In previous weeks, we built a system from scratch. That series of emails was one way to answer the question of how to start fresh.
Let’s answer it again – in a different way.
In the previous Starting from Scratch series, we mentioned there are two timeless trading methodologies: value investing and trend following.
We did value investing first. Now we’ll look at trend following.
If I had to start tomorrow, trend following would be a great place to start. It isn’t as psychologically pleasing as value investing (in fact, it’s much, much harder), but it has the most research behind it.
No other trading methodology has been studied like trend following. No other methodology goes back a hundred years with as much detail.
In fact, simple trend following research has been found to go back many centuries.
If something is higher now than it was before, buy it. If something is lower now than it was before, sell it.
This type of trading is easy to understand and easy to track. It’s not easy to find research on a system that enters Bitcoin on a Stochastic “pop” and takes off half on a bearish candle formation on bigger than average volume.
If I had to start tomorrow, I would pick something that’s been around for a long time, not a flash in the pan.
And I’d pick something that could perform in chaos.
Roiled markets are the most dangerous time for traders. It’s when we sell our index funds in panic and never get our gains back. It’s when we lose 50% and never take another trade. It’s when we buy on dips and the dips turn into an account-destroying free fall.
I want a system that does okay when things are not okay.
And trend following is that.
How has trend following done in 2020? It’s thrived.
A basic trend following portfolio (that we’ll talk about later) could be up over 200% this year:
Combining multiple futures instruments using a simple trend following system could be up 226% (depending on risk tolerance and trade size).
So, if I had to start tomorrow, trend following would make the final cut. It has the most research and the potential to thrive during chaos.
Unlike value investing, trend following is nearly impossible for most traders to do.
And we’ll talk about that next.
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It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.