My guest today is Chris Clarke, ex-Goldman Sachs executive director and founder of Lawrence Clarke Investment Management. Clarke has been developing trading systems for decades.
The topic is Trend Following.
In this episode of Trend Following Radio we discuss:
Trusting the system once you choose it
Being prepared to trade no matter which way the markets go
The importance of edge, and why gamblers lose
Looking at the math behind trading strategies
Understanding “market truths”
Drawdowns vs. risks
“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” – William Eckhardt
Please enjoy my monologue Simplicity Trumps Complexity with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Why simple strategies are better than complex ones
The importance of defining your risk as a number
How risk and reward are two sides of the same coin
Why going for the average is a losing strategy
The difference between hiring a financial advisor and an trader
“Financially-engineered assets often fail to perform as their creators intended. Or they are ill-equipped to deal with unanticipated events.” – Ky Trand Ho (Forbes)
Mentions & Resources:
Ben Carlson’s book, “A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan”
Forbes article, “What Jurassic World Can Teach Investors About The Stock Market”
The excitement and anxiety generally serve to medicate deeper issues.
Pithy? Yes. Depth behind it? Yes. Follow below.
Avoid the Day Trading Hype
Prior discussion:
“Hello, I am seriously considering purchasing your flagship trading systems course, but I have one very important (to me) question before I do. I gave up work 12 months ago and have spent 8-10 hours per day, mostly 7 days a week, studying trading. I confirmed for myself that trend following was the most profitable, and I also confirmed for myself that all indicators are useless for anything better than 50% accuracy. I have categorically proven to myself that prediction is futile and reacting and following the market is the only real option. So everything you say and seem to teach resonates well with me. I have read your trend following book which I think is the best book I have read on trading specifically. However, I have to disagree with one very important point you voice quite strongly, and before I buy your course I would like you to explain to me the following quote from your website FAQ page: “Day trading is fool’s gold. Our training will be worth millions to you over the course of a lifetime if you simply understand that day trading is a waste of time.” What I don’t understand is that from a technical aspect (if we ignore all fundamentals as you suggest) is that all charts are identical. If I showed you a one minute chart, a 1 hour chart or a 1 week chart, without any prices (simply the individual bars or candle patterns) you would not be able to tell the difference of time scale. A 1 hour chart will have just as many noticeable and strong trends as would a daily chart. If I am trading with a % risk per trade, the pip values are proportional. If I risk 1% on a trade with a 10 pip stop loss and ride a trend for 100 pips profit on a 1 minute chart, the impact on my account equity will be identical as if I risked 1% on a trade with a 100 pip stop loss and ride the trend for 1000 pips profit on a daily chart. The real difference is I will be able to trade far more often on smaller time frames than if waiting for trends on daily or weekly charts. Obviously I understand if someone is trading $ Billions then they simply can’t trade small time frames because of liquidity issues and getting orders filled. But for people starting out with less than $100,000, it makes no sense to sit there waiting for one trade per month, risking only 1% of my account, when I could be trading daily, using the exact same entry and exit rules. Surely technical analysis by its very nature is completely independent of time? You even state yourself in your book that the instrument is irrelevant because the charts and trends are the same for all markets……we just follow the trend regardless of fundamentals or the instrument. So how does time scale make any difference? I will be able to build my account much faster with exactly the same strategy and risk management if I trade intra-day while my capital is small, and then move up and scale in to trades as and when my trade size increases to where liquidity matters for order filling. I hope this question does not come across as argumentative in any way. I just genuinely don’t understand the logic, and I always need to understand something fully before I just follow blindly or take someone else’s word as fact. If you could help me understand why your way of thinking is correct, and where my logic fails, I would be very grateful and will be ready to purchase your trading course this week. My sincere thanks for you taking the time to read this email and hopefully answer.”
Kind regards,
James
Great question! Short answer: transaction costs and slippage are killers. Longer Answer? I am reposting an earlier question and answer session on the same topic:
“Hi Michael, I have been reading and following your website and blog posts for the past several months. I have to say that the information you provide is rare to come across in today’s internet world. The work you’ve done over the past several years has been amazing. I just wanted to introduce myself and ask you a question on which you may be able to shine some light on. Firstly, my name is [blank]. I am currently a student at the University of Toronto in Ontario, Canada. I am in my final year of, what they say, is a prestigious finance program in one of the top universities in the Country (although the quality of information i receive daily is, in my opinion, average at best). I will be graduating in a about 2 months and am one of the few lucky students, in this economy, to have been offered a full-time position post-graduation. In May, i will be starting a job as a junior trader in a prop-trading firm located in [blank]. The firm specializes in futures trading. Although i have been interested in trading and trade on a part-time basis for the past year or so, i am fairly new to the game. The firm is mainly a day-trading firm as many prop-trading firms are. I was wondering how your concept of “Trend-Following” applies to the day trading time frame (that is minutes, hours, etc)? Does this type of strategy only work for longer time frames or has it been successful with traders who use it to day trade? Thank you once again for everything you do. Hope to hear from you soon, [blank]”
It is tough. Many issues from transaction costs to a need for superior access and execution are working against you. Ed Seykota once gave some insights on short-term trend trading:
“Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost. In general, short-term trading systems succumb to transaction costs and execution friction. You might simulate your system over historical data and notice how sensitive it is to assumptions about where you get your fills…The shorter the term, the smaller the move. So profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it you might be able to make money with short term trading.”
Seykota was also asked:
“I am new to trend following and wish to ask you what your favorite chart is for determining a given market’s trend? Daily, weekly, yearly, hourly?”
Seykota responded:
“Hmmm…your list seems to lack scaling options for minute, second, and millisecond. If you want to go for the really high-frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light ‘by eye.’ I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor — something like a daily price chart, going back a year or two.”
I agree with Seykota’s wisdom, but he is not saying short-term is impossible. There are shorter-term systematic traders who have done quite well (Toby Crabel and Jim Simons, for example). They would agree with Seykota that their style is hard. The shorter you go, the more the need for great execution, fantastic data, and multiple systems. And in closing from Jessie Livermore:
“…the big money [is] not in the individual fluctuations but in the main movements — that is, not in reading the tape, but in sizing up the entire market and its trend.”
Big trends? Don’t we all just know those are right around the corner at all times. No prediction of what or when, but they are always coming.
Please enjoy my monologue Speculation Wins Today with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio we discuss:
Why speculation is such an important concept
The philosophy behind trend following
Watching results rather than causes
Cutting short your losses
Timeless excerpts from as early as the 1800s
The early beginnings of Wall Street
“Cut short your losses, let your profits run on.” – David Ricardo
CNBC: One of the U.K.’s most successful hedge fund managers [David Harding in pic] has spoken of the benefits of using the “emotionless systematic approach”.
My guest today is Jonathan Fader, a licensed clinical psychologist and is the team psychologist to the NY Mets baseball team. Fader also writes a blog for Psychology Today entitled ‘The New You’. He maintains an active clinical practice, is an assistant professor of Family Medicine at the Albert Einstein College of Medicine and teaches in the Beth Israel Residency Program in Family Medicine in New York City.
The topic is sports psychology.
In this episode of Trend Following Radio we discuss:
Fader discusses motivational interviewing, sport psychology techniques, process v. outcome, the mistake of focusing only on results, mental state and stress, mindfulness, Facebook distraction, Eastern traditions, the moment of now, and quieting the mind. Issues discussed apply to life, trading, sports and business–Fader offers insights we can all use.
Listen to this episode:
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