My clients often utter such concise expressions of trading insight that I rush to write them down. I was working with one newbie trader today who is just learning to trade the S&P e-mini futures. When he began using a simple mean reversion system he based it on one indicator (a moving average) and he had some impressive Beginner’s Luck, growing his account about 600% in 4 months.
When he told me this, however, I was both impressed and concerned. The gain was ‘awesome,’ but I assumed he was taking too much risk and that turned out to be true. A sudden 8% drawdown put him into an emotionally defensive posture and it cost him his Midas Touch. The honeymoon was suddenly over. He then got run-over on a strong uptrend day (trying to pick the top) and when he added to the loser his account mean reverted, as well. That’s the Beginner’s Curse.
As a result, I suggested he try a trend following approach since trading in the direction of a trend, even when daytrading, tends to be a tad easier. And because he relates to moving averages, I showed him a simple way of entering on pullbacks using three moving averages.
I’ve introduced a number of clients to this method in the past, but not everyone can trade simple. I remember one doctor who created a similar method for himself, but he could not follow it for more than a few minutes at a time. He constantly second-guessed the method and ended up in the weeds.
Additionally, many people start simple but complicate their trading by adding indicators and time frames ad infinitum. The newbie, however, unlike the doctor, scores high on the Trader Personality Type that likes to keep things simple and follow rules, so he took to it just fine.
After making 2X his daily goal (four figures) this morning in just one trade he said to me: “It used to be that trends hurt me. Now I love them!” If you are struggling in your trading, consider simplifying rather than complicating; and perhaps a trend following approach would also help.
