Ken Tropin on trend following (from The Greenwich Roundtable):
“To the trend-following trader, who has a model that’s timing the system–he gets in that trend and he participates in it, and because of the lack of subjectivity there, sometimes can benefit greatly from things that otherwise are hard to do. Most trend-following systems traders and there are lots of different types of systems traders. I’ll spend just a minute on a couple of them. But most long-term trend following systems traders are always doing something that is very, very difficult to do discretionarily–which is, waiting for a market to make its new highest price ever and then get in it. It’s never this feeling of: Oh, I really bought this right! You always have a feeling on every trade of: I really bought this wrong! After 20-something years of doing this, that is a profitable thing to do, believe it or not. But nonetheless, systems traders are clearly not front-running market opportunities. They are following them; and that’s why they’re called trend-followers. Some of the different types of systems in the industry: there are all kinds of systems and all different shapes and sizes. Perhaps if you look at the 50 or 60 billion that’s in CTAs, as people call us, I think it would be fair to say that 3/4 of those assets are in what are called trend-following systems. Trend-following systems, as I just briefly mentioned, tend to be longer term in nature; tend to have trades that last 2, 3, 4 months in duration; tend not to be able to perform very well in a sideways market; tend to be looking for big, global, macro events that happen from time to time and participate in and exploit those events.”
“Trend following systems are in general trying to do the following: they are trying to determine, in all of the market and macro events that happen every day, which of this price behavior is really a trend or is an emerging trend that’s happening, and which of what’s going on here is really noise. The art and science of a system is to be able to stay out of the noise and get involved in the right trends, hold those positions in the right trends until they ultimately fail. And every trend ever has always failed. And be able to make sure that when the trend fails, you have taken away some profit. By definition, trend followers never take peak profits, right? Because you’re always waiting for that market to tell you the trend is over. So of course you’re always giving back some unrealized gains.”
Ken Tropin once led John W. Henry’s firm.