Statistical data shows that this trading method will ALWAYS win.
So, why don’t ALL traders use it?
And why aren’t ALL traders making money with it?
It’s an old truism that ‘the trend is your friend’, but I want to show you that this isn’t some vague advice – I’ll show you hard scientific data that shows how trend-following can’t lose.
And I’ll show you why it works, and how you can harness these facts and turn them into concrete profits!
So, what’s a fat tail?
Imagine a trading strategy that opened a trade at random (buying or selling) in the market, with no stop level or profit target, and closed it a day later, and kept doing this over the course of a year. (Not a great trading strategy, I’ll admit – and I’m not recommending this!)
We might expect the distribution of our profits to look something like this …
You may have heard investors talking about ‘tail risk’, which is the risk of extreme outcomes. These ‘tails’ are the ends of our bell-curve chart, where the probability of these outcomes is low.
But market returns tend not to show these ‘normal’ distributions. Instead, extreme outcomes are more likely than most investors realise. These curves have what are called ‘fat tails’.
A fat tail means that there is a relatively high probability of the extremes being hit. I.e. you’re more likely to get big winners and big losers.
Many investors don’t appreciate how ‘fat’ these tail risks are – and it can often be their downfall, when unexpected big losses happen again, and again …
But, the smart investor recognizes these fat tails, and can use them to his or her advantage.
So, how can a fat tail help us?
Now that we know about these ‘fat tails’, how can we use them to our advantage?
Going back to our not-very-good trading strategy, which bought or sold the market at random once a day. If we adapted this strategy so that it had a stop loss, but no profit target, we could instantly cut off the negative fat tail, and start to profit from the positive fat tail.
We’ve made a profitable trading strategy, without even looking at technical analysis!
So why isn’t everyone making money with this simple statistical method?
The problem with our neatly symmetrical ‘fat-tailed’ bell curve, is that it only gets that tidy when it’s made up of thousands of trades. So, you’d have to suffer through a huge number of losers before you hit those big winners (even with a fat tail).
And, of course, the financial markets are a lot more liquid than our trading accounts, so most of us just don’t have pockets that deep. Plus, those thousands of trades will each have brokerage costs on them, which will eat into any profits we see.
The answer to the problem of capturing profits from a fat-tailed distribution curve is … trend-following.
The trend-following trader cuts losses fast, and lets profits run – this way they can take advantage of the fat-tail up-side, while removing the extreme losses.
The tricky part is finding the right balance between holding out for big profits, and not having to suffer long runs of losses. As we’ve seen, this method can’t fail – but you’ve got to be able to hold on long enough. Many traders run out of capital, or faith, or both, before they’ve given their trend-following method a chance to work.
And that’s the balancing act that I want to show you …
Both HAV Trading and Heikin Ashi Mountain use exactly these techniques to cut losses and let profits run and run.
With my Heikin Ashi Mountain system, I’ve developed three subtly different ways to trade, depending on the kind of ups and downs you’re comfortable with. The most aggressive method has the most volatile returns, but the biggest profits in the end. The least aggressive method gives a smoother, but flatter profit curve … and (my preferred method) falls in the middle.
All three use the infallible statistics of trend following and fat tails, ensuring profitability. And it’s up to you to choose the comfort level that suits you best.