I have just finished reading your communication on the “why sell system..” Here is my take on it. It is perfectly honorable to sell [a] system. I think there are two broad groups of people who buy systems.
One group who buys these with expectation that they are buying a machine to print money tomorrow are set up for immediate disappointment. They can’t/don’t follow it and experience it in real life and do only in bits and pieces and eventually abandon it.
The other group buys system as first step towards their education and if it works out for them they work on improving the system to match their needs and personality. Eventually they end up with something that has basic foundation they started with but totally different parameters etc.
So both group ends not using system they started with but they have entirely different outcome in the process. It is like attending High School: some people finish that and some don’t.
This is a complete hypothesis on my part, so do let me know if you have any insight on what happens after people buy your or any other system.
I can’t see how people think that if they buy anything from me that it is a machine to print money. Unless they are delusional. In terms of ‘system learning’ the Turtle experiment proved rules could be taught. Sure, you can modify, but it’s still trend following.
Of course, I am sure some don’t trade for any number of reasons. However, trying to figure that out is like studying fundamentals–a never ending futility.
As my account is still small (although up 150% so far) I find that I’m trading a lot. I get signals every day and in 3 months have made 185 (counting opening only). I find my self getting stopped out of trades because I can’t take a full position and then getting back in when the market comes back.
I’m not going more than 2 units per trade and 5 units per sector on [entry and] out 2 ATR 2% unit model.
So it’s going well and I’m excited about that but want to make sure I’m not just getting really lucky as opposed to implementing a life changing trading strategy.
Regards,
Jordan
This sounds very short term, and not trend following?
I [wish] I had read your book many years earlier! And your profiling of the long term track records of the some of the big practitioners inspires confidence and this has been borne out [in] academic studies [too]. Although I do not have the time to do trend following personally being a busy physician, I am beginning to deploy monies in managed futures especially because it offers a favorable tax structure. I have been an investor in hedge funds which have generated large short term gains leading to a heavy tax burden over the years.
I am using your resources to research many of the managers with good track records. Do you have any suggestions as to your favorites? I am looking for managers that offer leverage in addition to their standard program. I am currently invested in QIM which has 3x leverage and with Abraham Trading which offers 2x leverage.
Last, your passion is contagious and keep up your good work.
I don’t give recommendations on pro traders, but thanks for the nice words. I will try to keep it all going straight ahead!
Your recent podcast discussion on Speculation vs Gambling was stunning. Stunning enough to force me to take a moment and send this thank you email. Although we are submerged in information these days (blogs, podcasts, books), true, simple and genuine information has gotten harder to come by.
I have yet to write a review for your podcast. I am still evaluating. Don’t want to underrate you by just giving 5 stars. Michael, THANK YOU for clearing the bullshit in the air.
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.
How are you doing? I am considering relocating my CTA [pro trend following trader] businesses to New Zealand. Who do you know that I could speak with in that part of the world about the potential of opening new clientele potential for my management products?
Any thoughts that you might have on this subject would be appreciated as well….
Thanks,
[Name]
I have not been to NZ and have zero contacts there. That’s 13 hrs from me [in Asia]! Wish I had better news. Guessing that Singapore would be a better fit for client business. Or at least larger and more easy for launch. Most every [manager] I speak to has little going on [in Asia] except the very large ones. Even those seem to not have a great lay of landscape. Overall Asia is about being on the ground then working out the hard questions [and details]. Very tough to plan it when your not in the middle of it. That’s my single biggest insight after three years [spending much time in Asia].
Mike,
That confirms everything that I know and have learned. Thanks for the quick response.
Let’s hope the Chinese government will honor those STOPs. There’s a lesson there somewhere. I’m really enjoying your podcasts. Personally, I’m having trouble managing my clients’ monies in this whipsaw market. My STOPs are going off like firecrackers and then I watch the market spring back up. Most of my clients are in fee accounts so commissions aren’t killing them but the whipsaws are. Frustrating, but it ain’t supposed to be easy is it? I clearly need to use more non-equity ETFs. My model is way too seat-of-the pants and I need a true system.
I do appreciate you understanding that there do exist financial advisors like myself who do not subscribe to the buy and hope, multi-mutual fund nonsense propagated by the big bank-owned firms. I’m trying like crazy to use trend following as a bedrock approach to managing the risk of my clients and capturing the maximum gain. I suspect there’s a much higher percentage of trend following advisors at independent firms like [name] vs. Merrill Lynch. As a former [name] (I’m originally an [name] advisor) advisor, I know first-hand the amount of Kool-Aid being swilled.
