Trend Following Is An Illusion! Cover Your Eyes!

I get critics with agendas every so often. They are always sure that they have found the “hole” in trend following. Here is one. My response:

Geetesh Bhardwaj has no idea what he is talking about when it comes to trend following trading — regardless of how many degrees and awards are scotch-taped to his wall. Readers should know that Bhardwaj was a financial analyst for AIG. How much more needs to be said? AIG was one of the biggest scams to EVER hit the United States of America. We are all currently paying for the con artists and thieves who worked for AIG.

Trust me I know where I step and who I step on with my bringing the existence of trend following to a wider audience. Nearly the entire academic community, one built around efficient markets and fundamental analysis, can’t afford to have trend following be profitable. For if trend following exists, and it is profitable, people like Bhardwaj have no influence and no job.

Readers have a choice: examine the trend following performance histories of professional trend following traders going back decades OR listen to the opinions of the ivory tower elite whose primary job is to crank out academic waste product bought and paid for by the likes of AIG and Vanguard. Bottom line, if I don’t receive criticism from empty suits and college town professors tenured till death, I am not doing my job.

19 thoughts on “Trend Following Is An Illusion! Cover Your Eyes!

  1. What does he mean when he says “but doesn’t have any specific algorithms or mathematic modeling”.

    So I would ask this guy, what is the Average True Range?

  2. There’s a saying in spanish that says, “Let them talk good or bad about you, get worried when they stop talking about you”.

  3. The problem is that people assume that since Trend Following is easy (in hindsight), they try to reserach it using a MA cross or any other simple trend following system. Trend Following does work but is not easy and hence no one is ready to share their algorithm / strategy.

    The author of the paper (by 3 Phd’s) misses the above point. If building a trend following system was easy, guys such as David Harding (Winston Capital) would not have to hire around 100 guys with Phd’s in Maths to create strategies.

    Anyone expecting freebies should look elsewhere. What Michael does in my opinion is reinforcing the belief of trend following.

  4. Prashanth, you have mentioned the most important point about Michael’s work “reinforcing the belief”, and this goes beyond just believing.

    Trend following is also following rules religiously, believing in yourself and all what you can accomplish if you follow the rules. I believe this is the hardest part and believe me, you have to work hard to make it easy.

    Trends build by themselves, but you have to build your system.

  5. There are no algorithm / strategy secrets, it’s just another myth.

    There are plenty of publicly available trend following systems(including the turtle system) that make money. The hard part is few people are able to follow them. Trend following may be best understood by finding out how come most people are unable to follow such systems.

    I really doubt if the edge of long term trend followers would erode if they were to make their “secrets” public.

    p.s. Who knows why Harding hires 100 Phd guys. Maybe the guy likes running a large staff. Putting up those kind of numbers does not require 100 Phd guys.

  6. I myself believe that trendfollowing is far better than buy and hold based on the effecient market hypothesis.

    However you have to admit that what this “John” says in his second reply is also true: you can’t blame someone just for working at AIG. I would like to see Michael that you give your opinion on the points that are raised in the white paper. Discrediting one of three authors or just referring to a dozen or more succesfull CTA funds just isn’t that. For any strategy you can find dozens of funds with extraordinary track records, but nobody talks about the hundreds of funds that have disappeared due to poor performance or blow-ups.

    So Michael, here you have the chance to really convince a large audience about the benefits of trendfollowing if you answer the content of the white paper directly, in a factual way (for example about survivorship bias). I’ m really curious to hear your real arguments!

  7. I don’t have much patience for arguments against my work that ignore my work. There are 180,000+ words across my two books that lay out a very clear case for trend following. The good, the bad, and the ugly are in there. “Academics” who believe trend followers are lucky monkeys, academics who view the Sharpe ratio as a respectable measure (llke Geetesh), and academics who blur issues and strategies by focusing on government registration terms (read: CTA) OVER the actual strategy (trend following) are purposefully misleading readers. Why would they do this? If academics don’t defend efficient markets to the bitter end… generations of finance professors across the planet have clearly been ripping people off for a long time by taking a salary. Their efforts are all about preserving the fantasy of those degrees and awards they love to brag about.

  8. It’s the content that matters, Michael. Shooting the messenger is easy and is a sign of weakness. I tried to find your answer on the content, but it’ s not there, not in your book nor on the website.

    So stop playing a persons game and let’s have a real debate about the core issues of the paper. If the content of the paper is that stupid than it can’t be hard to give your real arguments.

  9. For any strategy you can find dozens of funds with extraordinary track records, but nobody talks about the hundreds of funds that have disappeared due to poor performance or blow-ups.

    For any strategy? Oh really. That is 100% bull.

    Your comment implies that all firms and traders are created equal. There are reasons why, for example, some Turtles failed. And hey guess what? I drill into those issues with painstaking detail. So, sure people fail…but go do your homework and find out why. I know why people fail at the game and have been helping people for a long time to put the odds on their side.

    If people believe, after examining every word of my book Trend Following, that the resulting philosophy, execution and performance were the result of “lucky monkeys banging on a keyboard of which a few hammered out Shakespeare”…which is what Geetesh believes…we will never see eye to eye.

  10. Michael,
    I always read with interest, opinions from people that disagree with your views on trend following.The reason that I do that, is because I am at the moment a risk analyst in London and the traders at my firm that have done the best over the last five years, have all been the guys that have followed the trend in their markets.I have just started trading a trend based strategy, similar to the Turtles style and after just three weeks I am up 4%, just on an account that is leveraged by five.Of course,I am going to suffer negative months and drawdowns, of maybe 10%,but I know that following the trend and having appropriate stop losses means that I am going to have more positive months.The key to me,as indicated on your excellent website,is to be able to manage the down months and stay in the game, so that you can profit from your winning trades.

  11. The fact of the matter is that there are a million ways to make and lose money on Wall Street. I love Paul Tudor Jones comments when asked what he thought about Technical Analysis, he replied “I Made well over half the money that I’ve made in my lifetime using technical analysis” and then the interview asks about his thoughts on Fundamental Analysis, to which his reply was “Made the rest”. I’ve met trend followers who have been wildly successful and a couple that have been completely laid to waste in volatile markets whether it was because their clients lost confidence during significant drawdown periods or they simply had weak algorithms and poor risk management. The argument that says that trend following never works is as foolish as the argument that purports that it always works. I think Michael does a decent job of laying out the good, the bad and the ugly in his books inasmuch as negative returns from the traders hilighted are there in black and white. Michale has established himself as the “go to” guy for this particular strategy- there will be critics… If you’re doing anything worthwhile, you can expect nothing less.

  12. The fact of the matter is that there are a million ways to make and lose money on Wall Street.

    A million where you can see decades of track records across one similar style like trend following? I have to disagree, I have not seen such.

    Further, and I think this is a subtle but important point, trend followers know from the beginning they won’t make money every day or every month. Almost every other strategy ever pumped is predicated on the “big return coming soon” or “consistent” profits. They never talk about the fact that it is impossible to make money every month so in that sense there is ample evidence that trend following has always worked — at least for many, many decades.

    Also, keep in mind the reason trend following is so interesting to me is there are no barriers compared to so many other strategies that people read about from big Wall Street names. Steve Cohen? Come on! That is so much access. Not knocking it, but who is going to replicate it? Jones talking of fundamental analysis? Well, he is also plugged into access that you or I will never have or is sitting there with an army of fundamental experts paid as if they were a Fortune 500 firm!

  13. Michael, I’m a big fan of your work and hope that any comments that are meant for clarification do not cast me into the abyss of trend following heretics. My statement was “The fact of the matter is that there are a million ways to make and lose money on Wall Street” and in truth, I was actually being quite conservative by limiting the possible investment approaches to 1 million… I think if you simply look at the quant approach alone with its plethora of variables and potential factorials and then factor in the possibility of different risk management models, you could come up with at least a million different algorithms without even looking at technical or fundamental investing with their myriad of potential approaches.

    There is no singular trend following algorithm that I’m aware of, unless you’re considering Dennis’ original Turtle Strategy the “only” trend following model. I use eSignal as a trading platform and though I do not trade using the “Turtle Strategy”, have 13 different variants (.efs scripts) of that strategy that all produce slightly different risk/reward profiles. Ed Seykota and Salem Abraham, though both trend followers, have very different approaches and having looked at their returns you can see that not only are their returns different, but their drawdown profiles aren’t remotely similar (two approaches of the million).

    As far as the access and resources that Stevie Cohen and PTJ have, our man Harding has a pretty huge staff of PHD’s- are they a necessary component of his success? Not sure, but again, with a very different risk/return profile than either Seykota or Abraham… there’s three of the million mentioned. You noted that Jerry Parker was the first Turtle to use less leverage, thus changing the model- there’s four of the million (ad infinitum).

    You stated that “…there is ample evidence that trend following has always worked — at least for many, many decades.” I’m quite sure that you understand survivorship bias and are not implying that there has never been a trend follower that has gone bankrupt. I certainly wasn’t criticizing trend-following as an investment discipline, but rather my statement was meant to clarify that “trend following” is one of many possible approaches and is NOT a singular (meaning that within the category of trend following there are many, many approaches) strategy that produces ONLY positive returns. It’s a great approach to the market and depending on your methodology, possibly the best, but I’ll stand by my original statement that “the argument that says that trend following never works is as foolish as the argument that purports that it always works.”

    You’re absolutely right about limited barriers being a benefit here. It’s quite phenomenal that the average Joe can use a rules based strategy and really make alot of money. However, at the same time, there are many who are sent to the graveyard because they have no personal discipline. So in short, I’m not pointing out a “hole” in trend-following as a strategy, nor am I trying to put you on the defensive, but rather trying to offer a balanced perspective to any reader who may have limited investment experience.

  14. Shane, I don’t take your comments personally! No worries. Some feedback:

    1. I don’t consider changing leverage of a trend following program…changing trend following. Risk and reward are related. It is a choice, but its still trend following.

    2. There might not be a single trading system, but the correlation of performance returns of pro trend following traders over decades can’t be ignored…especially since many are unassociated with each other but have very similar return streams.

    3. Survivor bias? Heard that many times, but unless one digs in and looks at other factors as to why failure happened, which I have done and many of my critics have not, debate is pointless. Who are the failures and why? Clients pulling money at the bottom of a DD is not a failure in my book. Several examples of this are across both of my books. Clients are usually wrong and bad timers.

    4. I will keep waiting for the list of disclosure documents across some other style where unaffiliated traders make and lose money at roughly the same time…all the while continuing to have great performance in the long term. I put names and performance in my books. I am just waiting for specifics.

    It’s weird. I always find people trying to disclaim trend following, but the arguments that do this are always far less specific (re: no hard data) and usually just generalities that can’t be proven or not proven.

  15. Shane, you’ve seen Seykota’s performance data? I suspect that his risk/reward profile is closer to that of Bill Dunn’s rather than Abraham’s or someone who has implemented counter-trend and short-term trend following strategies. Seykota and Dunn also seem to have the same old school temperament in regards to achieving absolute returns.

  16. Yes Mel- I’ve actually follwed traders that aren’t published and hopefully you see what I was talking about. Absolutely nothing negative about trend trading, just a little transparency and clarification. I like Seykota because both he and his approach are very simple. What you see is what you get.

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