What If Everyone Does It? Trend Following That Is

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Hi Mike, I found the DVDs in the mail box yesterday. Thanks for sending them up! I popped the Bruce interview in right away. Good stuff. It reinforces my confidence in what I’m doing, I only wish I had picked up on this 20 years ago. Also thanks for the surprise copy of Broke. Glad to be able to watch it again. I enjoyed your latest podcast and happy to hear the traffic’s up! I’m a bit of a math enthusiast so I thought the Ralph Vince interview was pretty cool. I literally pulled over and ordered his portfolio handbook on the spot. No doubt your podcast generates some decent business for your interviewees. I hope you’re seeing an increase in business traffic too!

Hey, as the trend following message reaches a greater audience, it makes me curious to hear what your thoughts are on the far fetched question of what would happen to markets if a majority of market participants adopted trend following (how many times do you get this one)? I believe that’s a virtual impossibility, since among the current minority of trend followers many probably don’t even follow their systems properly. One would also suppose that the underlying supply and demand forces for actual commodities, goods and services would always drive a trend at some point, no matter how many trend followers were waiting for a move. Also, let’s not forget the invisible hand of… governments. I guess since a lot of trading is done by participants who ultimately are end users of the produced units (who knows what proportion that actually is) that makes the “majority as trend followers” an impossibility (and probably a good thing). It would be an interesting thing to model even if the premiss really isn’t possible. Would prices flat-line or trend even more? Cheers!

Good question! Short answer? Not really, hence my 4 books!

An excerpt from my book Trend Commandments that goes right to the issue:

In case you’re concerned that this book will create a whole new generation of trend followers who will negatively affect the frequency, direction, and intensity of trends (as well as your ability to make money trading trends), forget it. Here are reasons why systematic trend following will continue to excel:

• Trend followers follow. They don’t generate trends. At the beginning or end of a major trend, there may be volatility, but it will be an extremely superficial, temporary effect.

• People play zero-sum games for many reasons. Not all play to win. Hedgers, for example, trade the market for certain reasons. It’s portfolio protection for them. Their insurance premium goes to trend following speculators. The hedgers are getting a benefit even when they lose.

• People would no longer buy and hold. Those believing in fundamental analysis (the vast majority of market participants) would have to switch how they trade. They would need to cease buy and hold and/or long only approaches and start trading as trend followers.

• Most do not “sell short.” They trade “long only.” That changes when?

• People would have to dump mutual funds. That will be hard with retirement programs literally mandating 100 percent investments in mutual funds.

• Most traders don’t think about how much to buy or how much to sell. They only worry about when to buy and rarely think about when to sell. That thought process is very hard to break for a mass trend following conversion.

• CNBC, WSJ, Bloomberg, etc. would need to end.

• People would have to disengage their emotions and egos from their trading. However, as long as there are human beings involved in the trading process, there will be excessive reactions and trends to exploit.

People would need to stop gambling… They might stop eating too.

Frequently the question is asked, “If trend following works so well, why aren’t more people doing it?”

Acknowledging complete ignorance about the future is tough to accept, admit, and act on, but that is what trend following requires you to do.

Said another way? This scene from No Country for Old Men:

One thought on “What If Everyone Does It? Trend Following That Is

  1. People just do not believe the market can be timed, so forget that idea of seeing a large number of trend followers. I have some dedicated trend followers, but they are not beating down my door to join my list. Those who do join my list become very concerned about how long I am going to live.

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