Category: Trend Following

Barbara Dixon, a student of famed trend follower Richard Donchian, wrote twenty years ago in Commodities magazine:

Donchian is one of the most respected technicians on Wall Street – especially in commodities. He began his career on 1930 and says he became hooked on markets when read Edwin LeFevre’s fictionalized biography of Jesse Livermore, Reminiscences of a Stock Operator. His interest in technical analysis arose after he suffered some losses following the 1929 crash. This led to his discovery that only the chartists made sense and money. Donchian wrote his first market letter in 1930 at the age of 25, and Shearson’s present ‘Trend Timing’ commodity letter originated in 1960 when Donchian joined Hayden Stone. These letters have served as primers for countless commodity traders. The ‘Twenty Trading Guides’ make a fine supplement to the letters and will probably survive and prove valid for the next 44 years as well.

General Guides

1. Beware of acting immediately on widespread public opinion. Even if correct, if will usually delay the move.
2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
3. LIMIT LOSSES, ride profits – irrespective of all other rules.
4. Light commitments are advisable when a market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting, and concentration on these moves to the virtual exclusion of others will prevent unprofitable ‘whipsawing.’
5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for one-day reversal.
6. Judicious use of stop orders is valuable aid to profitable trading. Stops may be used to protect profits, to limit losses and to take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
7. In a market in which upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons – a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.
8. In taking a position, price orders are allowable. In closing a position, use ‘market’ orders.
9. Buy strong acting, strong background commodities and sell weak ones, subject to all other rules.
10. Moves in which rails (now the Transportation Index) lead or participate strongly are usually worth following more than moves in which rails lag.
11. A study of the capitalization of a company, the degree of activity of an issue (a varying factor), and whether an issue is a lethargic truck horse like Consolidated Edison or Exxon or a spirited, volatile race horse like Teledyne (NYSE) or Resorts International (American) is fully as important as a study of statistical reports. (Volatile stocks are 1978 counterparts of two issues mentioned in 1934, Aluminum Co. of America, then on the Curb, and Case Threshing Machine, now J.I. Case, a part of Tenneco.)

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Feedback from a reader in Malaysia:

Hi Michael, First of all I would like to say THANK YOU for writing what must (or should) be the most important finance theory book of recent times. It was an absolute revelation, an eye-opening, out-of-this-world experience…well for me, at least. I work as a fund manager in the largest financial institution, here in Malaysia and it is not easy to put forward this Trend Following concept which seems so alien to the traditional fund managers in Malaysia. As you have rightly mentioned…some people do it to become smart or to show-off their intelligence and capability to analyze hundreds of accounts, economic data and financial data, whereas the enlightened ones..simply do it for money. I have never believed in fundamentals from the very beginning of my training and have been labeled as a loose-cannon cowboy fund manager amongst my peers for my refusal to accept any of the fundamental/traditional economic theories. Your book has given me the enlightenment that I so need and to know that there is such a simple concept/theory as following something as simple and real such as price is absolutely godsend! You wont believe how thrilled and ecstatic I was after reading the book that my wife bought for my birthday. She must have gotten ear bleed from listening to my babblings about Trend Following! I started my training in technical analysis, which after awhile I found to be useless as well because there is no way anybody can predict anything and I have become a complete convert after reading your book. But I would greatly appreciate if you could provide some insights and advice on how to use the system in a long equity (only!) market? I have developed an Excel based system to backtest my parameters and the result is astounding. Using crossings of simple moving averages, the return from the sample data of Top 60 stock (in terms of market cap) in the Kuala Lumpur Composite Index was an unbelievable 1800% for the past 10 years from 1996-2005. Can this be right? Am I doing something wrong or is the system THAT good? Perhaps I need to get the Wealth Lab software for a more reliable backtesting system and get more detailed results and analysis of the system? I would also appreciate if you could advice on how I can argue the concept of following price against fundamentals, as I am continuously being shot down by my superiors and the Chief Investment Officer who seems adamant that there is no other way except the fundamental way! Our daily morning meetings are flooded with discussions on what Bernanke meant, where the US interest rate is going, the Malaysian GDP, the US dollar vs. ringgit, inflation level and the topic of the year, OIL PRICE! And my supremely intelligent research team constantly tries to find non-existent correlations between everything and anything and how it will affect our local stock market! I’m beginning to feel very frustrated that nobody seems to be able to accept that none of that works and the only thing we can use is PRICE! XXX Portfolio Manager – Equities

Wealth-Lab is definitely a step in right direction.

In terms of arguments about trend following v. fundamental analysis, my book, blog and podcasts should give plenty of ammunition!

Mark J. Walsh was not a Turtle, but Mark was close enough to the Turtle experiment and Richard Dennis early in his career to learn the ins and outs. Now 20 years later, Mark still a relatively young man, has put together an impressive track record (PDF) as a trend following trader.

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How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

• Trend Following Podcast Guests
• Frequently Asked Questions
• Performance
• Research
• Markets to Trade
• Crisis Times
• Trading Technology
• About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

I was in Chicago today for the Managed Funds Association’s Forum. The lunch keynote was delivered by Elizabeth Cheval, Chairman, EMC Capital Management, Inc. and was titled ‘Let’s Get Negative! Correlation and the Case for Managed Futures’.

Cheval’s presentation was easily one of the best I have seen in the industry. Tackling a subject like ‘correlation’ and making it user friendly is not easy, but Cheval hit the mark. Some highlights with more to follow in the next week:

1. She framed the conversation in two parts: 1.) Human Investment Psychology and 2.) The Mathematical Solution.

2. The psychology that led to the tech boom/bust influences our portfolios every day. The psychology that led to the tech bubble does not go away and it is still a useful example because it is in reach of short-term memory.

3. She outlined chronocentricity [from this book] or the inborn egotism that one’s own generation is poised on the very cusp of history. Everyone should see why she was speaking of this.

4. Her definition of correlation: the nominal measure of the tendency for two assets to concurrently under perform or over perform their average returns by the same number of standard deviations.

5. You want negative correlation as much as you can get it in your portfolio as long as the components added are positive returns.

Wise feedback:

“Hi Michael, I’m a trader in the Asian Markets and I’ve always been baffled at why many of my colleagues don’t seem to understand how markets work. I just read you book, Trend Following, and now I understand just a little bit why. I have a friend who just finished his CFA examinations recently and after discussing with him my actual trading experiences as well as the ideas in your book, he mentioned that given the way finance is taught nowadays, it’s very possible to pass the CFA examinations and not know the first thing about real, practical, and successful trading. By the way, I keep this quote from William Arthur Ward near my desk, and I think it perfectly captures the essence of trend following and trading. Best Regards, Doc”

“To laugh is to risk appearing a fool,
To weep is to risk appearing sentimental
To reach out to another is to risk involvement,
To expose feelings is to risk exposing your true self
To place your ideas and dreams before a crowd is to risk their loss
To love is to risk not being loved in return,
To hope is to risk despair,
To try is to risk to failure.
But risks must be taken because the greatest hazard in life is to risk nothing.
The person who risks nothing, does nothing, has nothing is nothing.
He may avoid suffering and sorrow,
But he cannot learn, feel, change, grow or live.
Chained by his servitude he is a slave who has forfeited all freedom.
Only a person who risks is free.
The pessimist complains about the wind;
The optimist expects it to change;
And the realist adjusts the sails.”
– William Arthur Ward

More.

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How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

• Trend Following Podcast Guests
• Frequently Asked Questions
• Performance
• Research
• Markets to Trade
• Crisis Times
• Trading Technology
• About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Salem Abraham has been at the trading game for many years now. His track record exceeds 18+ years (PDF). While his performance consistently grows, client restlessness never stops. Clients typically, and this is by no means unique to Abraham, panic at the “bottom” often missing the new equity highs. Study Abraham’s performance. There are key lessons there for all. More on Abraham here (PDF).

David Druz, a trend follower with a lengthy track record, offered this tidbit on his web site:

“The robustness of a trading system is proportional to its volatility. This is the no-free-lunch part. A robust system is one which works and is stable over many types of market conditions and over many timeframes. It works in German Bund futures and it works in Wheat. It works when tested over 1950-1960 or over 1990-2000. Robust systems tend to be designed around successful trading tactics (origin of our “Tactical” name), classical money management techniques, and universal principles of market behavior. These systems are not designed around specific types of markets or market action. And here is the amazing thing about robust systems: The more robust a system, the more volatile it tends to be! This is because robust systems are not optimized to particular markets or market conditions. The converse is also true. You can design systems with excellent returns and low volatility on historical testing, but which work only for given periods in given markets. These systems tend to be curve-fit or market-fit and are not robust. For a system to have the highest odds of profitability over time and markets, the inescapable tradeoff is volatility. Diversification is used of course, but it will only dampen the volatility so much.”

Trend followers put out publicly available documents listing their backgrounds and performance. These are usually interesting to read even if not making an investment with that particular trader. These “disclosure documents” are freely available from the government via Freedom of Information requests and or directly from the trader. Here is one from David Druz.

Disclaimer: I have no business relationship with Druz. I write about what interests me. If you have a good idea for a blog entry here, drop me an email.