Nick Radge - Key elements of a trend-following trading strategy
In this podcast Michael Covel and Nick Radge discuss the key elements of a successful trend-following trading strategy. Nick Radge is primarily a long -only, trend-following, equity trader operating out of Australia. Nick discusses how he got into trading in 1985 including his experiences on the trading floor during the October 1987 stock market crash and the lessons learned from that experience that have made him the successful trader he is today. Nick and Michael explain, using detailed examples, that to be a successfully trader you must have a money management strategy, an exit strategy and least importantly, an entry strategy. Nick discusses his “20% flipper strategy” that is outline in his book “Unholy Grails” which as an annualized return of around 20%. The podcast includes a discussion on how algorithmic and high frequency trading will not impact trend following trading as trends are caused by human behaviour and will always exist. Nick discusses a couple of trading analogies that involving teaching a teenager to drive and hitchhiking. The hitchhiking analogy alone is worth the listen. Both Nick and Michael regale us with their humorous, real-life, hitchhiking stories. Throughout the discussion there are many interesting references to the Turtle trend-following traders. Nick can be reached at www.thechartist.com.au.
Lessons from Podcast that will make you a better trader
- Simplicity works. Your rules should be clear and concise. You should be able to summarized them on the back of an envelope.
- To be a successful trader you need to be comfortable be wrong more than you are right. People look for strategies with a high win percentage but that is not necessarily a requirement for a successful trading strategy. Nicks win rate for his main long only equity strategy is 50%. His annualized return is 18%.
- Don’t be afraid to buy strong performing stocks. If a stock is going to go up 100% it has to go up 20% first.
- You need to clearly understand why your strategy works.
- Don’t pick stocks, let them pick you.
- You need to consistently execute your strategy. You can’t afford to miss any portion of a trending market if you want to outperform the market.
- People get scared after market bottoms and don’t want to participate. You need to have the discipline to override this natural human tendency. If you have a clearly defined trigger to get in and out of the market this should not be an issue.
- Don’t bring your economic or political views into your trading as this will impact your trading decisions. Trade the market independent of the daily news cycle.
- Make sure your strategy includes a mechanism to get you into a trending market and don’t question why the market is trending.
- Risk/money management is the most important component of your trading strategy. Many trading strategies suggest that you should risk no more than 2% of your trading equity on any one trade. For many traders 2% is way beyond their comfort level. At some point you will have 15 losers in a row. Risking 2% that will result in a 30% drawdown.
- As a trader you must realize that all successful trading strategies will have drawdowns, and you need to experience these drawdowns to trust and consistently execute your strategy.
- Remember buy and hold S&P investors occasionally have 50% drawdowns on 8% annualized returns
- Some of the world’s best traders have systems that result in 60% drawdowns. Higher drawdowns often result in higher annualized returns.
- Remember that trend-following returns are “lumpy”. A trading strategy that has 20% annualized returns will have 45-degree positive equity curve over 20 years but if you zoom in you will see years with 60-degree negative equity slopes.
- Nick noted that he completed a time window analysis for his main trend following strategy and found that it takes 22 months to have 100% probability of making a profit. Assuming you have backtested your strategy and confirmed that it has an edge, you need to give your strategy plenty of time (i.e. 22 months) to work its magic before you switch to another system. You will never be successful jumping from one trading strategy to another.
- For new traders remember that the markets are always going to be there. Develop and backtest a strategy that has an edge before you jump into the market.
- A successful trend following strategy will work in any financial marketplace.