Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

CHAPTER 3

Trend-Following Systems

A Matter of Fortitude

Patience and fortitude conquer all things.

—Ralph Waldo Emerson

This chapter and the next two address trading systems tailored toward the three basic trader personality types: trend-following, mean-reversion, and day-trading personalities. Although there are infinite gradations within each of these categories, years of empirical observation have led me to believe that all traders display a natural inclination to gravitate to one of these three basic psychological profiles.

This chapter examines in detail the profitability and robustness of various trend-following systems outlined in Chapter 2. A cursory examination of the trend-following system examples in that chapter clues us in to two traits necessary for successful trend traders: patience and fortitude. Although it is tempting to merely gloss over the other statistics and focus on the total net profit column, we really need to search our innermost selves and ask such questions as: Am I prepared to stick with this trading technique after suffering seven consecutive losing trades? and Can I make my peace with enduring twice as many losing as profitable trades?

Few who embark on the path of system trading ever ask themselves these questions beforehand. And yet they are obviously the most important issues for the trend trader to address. This is why in the book's preface I emphasized that the development of a successful trading system is almost beside the point. Given enough ...