My Trading Philosophy: Trend Following, Small Stops and Big Risk/Reward

Risk reward in trend following is, before it is ever a number, a choice of method: spend little on each attempt — small, tightly controlled stops — so that a strong trend can turn a tiny risk into a large profit. It is the trading philosophy our founder Stefano Mastria recounts in the video, and, as he explains, it has not changed since his first publications back in 2009-2010: small controlled losses, profits left to run, no prediction. This article doesn’t start from the basics of the method — instead it tells the house’s own angle: the operative philosophy behind asymmetric risk/reward and the idea of “trading on reality” rather than on forecasts.

What is the trading philosophy behind trend following?

For Stefano Mastria trend following isn’t one technique among many: it is his approach to the business, a philosophy that has stayed the same over the years because it is “sound” and because it lets him control risk very carefully. The core mechanism is simple to state: you hook onto a trend with a limited risk at a reaction point; if that point has plenty of liquidity, the market “pulls away” and develops — at least potentially — a large profit. The aim, in other words, is to intercept a strong trend while spending little to try.

This is the meaning of “small stops, big risk/reward”: you accept spending little on each single attempt in order to have the chance of catching a wide move. There is no promise in any of this — the method helps you govern risk, it does not guarantee a gain — but there is a precise logic: losses are kept small, profits are left to run. Over the years Stefano Mastria has worked to innovate (returning to publishing on YouTube and folding artificial intelligence into his research), yet the foundation has stayed identical to the one he learned at the start.

Why small stops and a high risk reward in trend following?

The advantage is that, when a strong trend is present, you can draw a large profit from a small cost, or from a series of small costs. That asymmetry is what makes risk reward in trend following interesting: a lot to gain, little to risk on each try. There is a flip side, though, and it is honest to say so: to obtain a longer-term profit you have to give up a shorter-term one. You can’t have everything, and the risk/reward ratio isn’t decided at a desk — it has to be set “on what reality does”, that is, on how the market you actually trade behaves.

“It is the data that tells us what to do: we don’t have to discover anything, we only have to do research.”

What does “trading on reality” mean?

“Trading on reality” is the principle Stefano Mastria attributes to three reference authors — Van Tharp, Larry Williams and Joe Ross. The idea is that the only real secret to earning on the markets is to understand how your own reference markets work: to discover the mechanisms the market produces in order to function, and to grasp how to exploit some of them to turn activity into profit. It isn’t about predicting: it is about observing what the market already does and working on that.

From this a practical corollary follows: the retail trader’s biggest mistake is doing no research and no planning. With good research the details emerge that let you put an excellent strategy to work with few interventions and good results at the right moments; the more time you devote to planning, the less risky and more effective your trading will be. It is the same ground covered by sound risk management and by Van Tharp’s money management: first you study and manage, then — possibly — you profit.

“This is what the data says, not what Stefano Mastria says.”

Why should you never chase the market?

The sharpest rule is this: never chase the market. It holds for an automated strategy just as it does for a directional one — “the rule is always the same”. Looking at the data, a counter-intuitive fact emerges: the months that produce the biggest profits are often the months that cost little. There may be some costs before you reach a profit, but when the market struggles it generally can’t produce — and in those moments chasing it is only a way to spend more.

When the phase is difficult, risk control takes over: you settle for managing small, very small costs “to keep going”, always protecting capital. “You always have to keep going”, but with contained costs, waiting for the market to offer trends again. It is the same discipline behind closing trades quickly and cheaply: the ability to exit fast and at a low price is what keeps the whole risk reward in trend following in balance.

Which books shaped this approach?

The philosophy doesn’t come from nowhere: it is a genealogy of readings Stefano Mastria has always recommended. Joe Ross, with his books on “trading as a business”; Jack Schwager, author of Market Wizards (available only in English), who by interviewing many traders — a good share of them trend followers — discovered something essential: while they shared a common philosophy, they used very different strategies. There is, in other words, no single method that works for everyone: there is a philosophy to “marry”, after which each person has to do research to find the methods closest to their own needs.

Rounding out the list are John Murphy with Technical Analysis of the Financial Markets, Larry Williams with Long-Term Secrets to Short-Term Trading, and Van Tharp — many of his texts are in English, while in Italian Stefano Mastria cites Financial Freedom Through Electronic Day Trading, calling it “an excellent book”. Anyone who wants a reasoned starting point on these masters can begin with what Larry Williams teaches about short-term trading.

Long or short term: which risk/reward should you choose?

Here we only touch on the topic, because it deserves an article of its own. The point is that continuity and magnitude are in tension: a long-term solution produces large but rare profits; a short-term solution — even intraday or across the week — gives a less important but more frequent result. Both are obtained by optimizing the same kind of trend-following strategy in different ways (for the short term, for instance, with a tool like the trailing stop). “I want to earn more” means accepting a less frequent profit; “I need a more frequent profit” means reducing its size. It is always the same method, calibrated to different objectives.

To make all this observable, in the video Stefano Mastria shows a quantitative strategy on gold-dollar (XAU/USD), developed with artificial intelligence too and oriented to the long term: it earns when trends are present and produces small costs when they aren’t. The optimization settings shown — a dynamic risk per trade, a monthly drawdown limit, break-even after a certain threshold and a profit target beyond which the strategy stops — are backtest settings, not guaranteed results; on paper, in the simulation, the logic behaved well over a long historical window, but a backtest does not in any way guarantee real or future results. A recurring teaching detail is MFE (Maximum Favorable Excursion): the profit a strategy had “in hand” and failed to capture, a gap you can work on by studying the data.

What can a trader learn from risk reward in trend following?

The underlying lesson is twofold. First: choose a philosophy consistent with your needs and then do research to find the right methods, instead of hunting for the perfect shortcut that doesn’t exist. Second: always put risk control ahead of everything, because that is what lets you stay in the market long enough to let the few large moves mature — the ones that pay for the rest. The analysis pages in the community’s reserved area — the DB Strategie, where large masses of data are studied — exist precisely for this: they are research tools, not promises of return.

In short, risk reward in trend following isn’t a trick for getting rich quick, but a disciplined way of staying in the markets: small losses, profits that run, decisions taken on the data and never out of a chase. It is a working framework that helps you manage risk; the results, as Stefano Mastria reminds us, are “told by the data” of yesterday, and guaranteed by no one for tomorrow.

Frequently asked questions about risk reward in trend following

What is the “small stops, big risk/reward” philosophy?

It is the idea of spending little on each attempt — with small stops and limited risk — so you have the chance of catching a large move when a strong trend arrives. You accept small, frequent losses in exchange for potentially wide but rare profits: an asymmetric profile that keeps risk under control without guaranteeing any gain.

Why should you never chase the market?

Because, looking at the data, the most profitable months are often the ones that cost little: when the market struggles it generally doesn’t produce, and chasing it only raises costs. The rule holds for automated strategies and directional ones alike. In difficult phases you manage small costs “to keep going”, always protecting capital.

What does “trading on reality” mean?

It means not trying to predict the market, but studying how your own reference market actually works and exploiting its mechanisms. As Stefano Mastria says, citing Van Tharp, Larry Williams and Joe Ross, “the data tells us what to do”: the trader’s job is not to guess, but to do research and planning.

Which books should you read to start with trend following?

Among the readings recommended by Stefano Mastria are Joe Ross’s books on “trading as a business”, Jack Schwager’s Market Wizards, John Murphy’s Technical Analysis of the Financial Markets, Larry Williams’s Long-Term Secrets to Short-Term Trading and, from Van Tharp, his work on financial independence. The common message: marry a philosophy, then do research on the methods.

Do backtest data guarantee future profits?

No. All the figures shown in the video — risk settings, drawdown limits, profit targets, MFE excursions, the gold-dollar strategy’s outcome — are historical or simulated backtest data. A backtest describes how a strategy behaved on past data and does not in any way guarantee real or future results. Trading carries a concrete risk of losing capital.

The contents of this article are for informational and educational purposes only and report the method and personal opinions of the founder of Trend Following Traders, Stefano Mastria, as presented in a video on the channel; they do not constitute financial advice nor an invitation to trade. All figures and settings cited (risk per trade, drawdown limit, break-even, profit target, MFE excursions and the gold-dollar strategy’s outcome) are historical or simulated backtest data: backtest results do not in any way guarantee real or future results.

The references to the analysis pages and the community’s reserved area, to the DB Strategie and the quant strategies, and to optimization with artificial intelligence describe research and production tools, not promises of return. No profit is guaranteed: trend following involves series of small losses before profits, and the use of financial leverage and prop trading cuts both ways, carrying a concrete risk of losing capital.