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Overpopulation: A Trend Following Debate

When asked about trend following becoming “overpopulated” a Richard Dennis quote is often best:

“I don’t think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline.”

Psychology and following the rules are paramount–bottom line. Consider more from an excerpt from The Complete Turtle Trader:

The techniques that Dennis and Eckhardt taught the Turtles were different from Dennis’s seasonal spread techniques from his early floor days. The Turtles were trained to be trend-following traders. In a nutshell, that meant that they needed a “trend” to make money. Trend followers always wait for a market to move; then they follow it. Capturing the majority of a trend, up or down, for profit is the goal.

The Turtles were trained this way because by 1983, Dennis knew the things that worked best were “rules”: “The majority of the other things that didn’t work were judgments. It seemed that the better part of the whole thing was rules. You can’t wake up in the morning and say, ‘I want to have an intuition about a market.’ You’re going to have way too many judgments.”

While Dennis knew exactly where the sweet spot was for making big money, he often fumbled his own trading with too many discretionary judgments. Looking back, he blamed his pit experience, saying, “People trading in the pit are very bad systems traders generally. They learn different things. They react to the [price] ‘tick’ in your face.”

Feedback from a listener that addresses Richard Dennis:

Hi Michael,

Hope you are doing well. Again, I appreciate everything, specially your commitment to the trend following podcast. In a recent back to back [other podcast] between [name] and [name] they address an important question:

Q: What lessons do you take from the fall of Richard Dennis? One of the biggest swingers at the Board of Trade…great trader…not only that but he believed he could replicate trading skills and did so successfully. He trained a whole generation of people who came up [and] manged billions…and then he basically goes and explodes. What is the practical lesson for your audience here?

A: Speaking to the trend following school in particular (and various trend followers who blew up or bled out): I do believe that certain trading styles and methodologies can suffer greatly from overpopularity. When there are too many people following a widespread strategy, and not enough differentiation among that active group, the strategy can be degraded to the point of no longer working.

Personally, I don´t agree with that argument because market trends have been persistent over time. As Howard Marks said: “We don´t have to worry about everybody becoming to prudent or to wise, because we are talking about human nature.”

I would appreciate your insight on this argument.


I don’t see any argument. My views on this are answered across 2 books comprehensively (the question above has some inaccuracies for starters):

1: The Complete TurtleTrader
2: Trend Following

My best response is in about 180,000 combined words (that is not a dodge; reality is that my answer is long). And yes I talk about the good and bad of Richard Dennis, but the good far outweighed the bad.

Right Action and Beliefs: Foundational for Trading Success

The rules and the math are a mission critical part of trend following success, but your mind’s organization will always be the determining factor for long and worthwhile gains. Marcus Aurelius wrote:

Two kinds of readiness are constantly needed: (i) to do only what the logos of authority and law directs, with the good of human beings in mind; (ii) to reconsider your position, when someone can set you straight or convert you to his. But your conversion should always rest on a conviction that it’s right, or benefits others–nothing else. Not because it’s more appealing or more popular.

This is why so many convert to trend following–it can be believed and it is right.

The TurtleTraders Had 5 Questions for Their Trading

The Turtles’ core axioms were the same ones practiced by the great speculators from one hundred years earlier:

“Do not let emotions fluctuate with the up and down of your capital.”
“Be consistent and even-tempered.”
“Judge yourself not by the outcome, but by your process.”
“Know what you are going to do when the market does what it is going to do.”
“Every now and then the impossible can and will happen.”
“Know each day what your plan and your contingencies are for the next day.”
“What can I win and what can I lose? What are probabilities of either happening?”

However, there was precision behind the familiar-sounding euphemisms. From the first day of training, William Eckhardt outlined five questions that were relevant to what he called an optimal trade. The Turtles had to be able to answer these questions at all times:

1. What is the state of the market?
2. What is the volatility of the market?
3. What is the equity being traded?
4. What is the system or the trading orientation?
5. What is the risk aversion of the trader or client?

There was no messing around in Eckhardt’s tone, as he suggested that these were the only things that had any importance.

What is it the state of the market? The state of the market simply means. “What is the price that the market is trading at?” If Microsoft is trading at 40 a share today, then that is the state of that market.

What is the volatility of the market? Eckhardt taught the Turtles that they had to know on a daily basis how much any market goes up and down. If Microsoft on an average trades at 50, but typically bounces up and down on any given day between 48 and 52, then Turtles were taught that the volatility of that market was four. They had their own jargon to describe daily volatilities. They would say that Microsoft had an “N” of four. More volatile markets generally carried more risk.

What is the equity being traded? The Turtles had to know how much money they had at all times, because every rule they would learn adapted to their given account size at that moment.

What is the system or the trading orientation? Eckhardt instructed the Turtles that in advance of the market opening, they had to have their battle plan set for buying and selling. They couldn’t say, “Okay, I’ve got $100,000; I’m going to randomly decide to trade $5,000 of it.” Eckhardt did not want them to wake up and say, “Do I buy if Google hits 500 or do I sell if Google hits 500?” They were taught precise rules that would tell them when to buy or sell any market at any time based on the movement of the price. The Turtles had two systems: System One (S1) and System Two (S2). These systems governed their entries and exits. S1 essentially said you would buy or sell short a market if it made a new twenty-day high or low.

What is the risk aversion of the trader or client? Risk management was not a concept that the Turtles grasped immediately. For example, if they had $10,000 in their account, should they bet all $10,000 on Google stock? No. If Google all of a sudden dropped, they could lose all $10,000 fast. They had to bet a small amount of the $10,000, because they didn’t know whether or not a trade was going to go in their favor. Small betting (for example, 2 percent of $10,000 on initial bets) kept them in the game to play another day, all the while waiting for a big trend.

Note: Excerpt from The Complete TurtleTrder.

16 Life Rules from Bob Parsons, Founder of

1. Get and stay out of your comfort zone.

I believe that not much happens of any significance when we’re in our comfort zone. I hear people say, “But I’m concerned about security.” My response to that is simple: “Security is for cadavers.”

2. Never give up.

Almost nothing works the first time it’s attempted. Just because what you’re doing does not seem to be working, doesn’t mean it won’t work. It just means that it might not work the way you’re doing it. If it was easy, everyone would be doing it, and you wouldn’t have an opportunity.

3. When you’re ready to quit, you’re closer than you think.

There’s an old Chinese saying that I just love, and I believe it is so true. It goes like this: “The temptation to quit will be greatest just before you are about to succeed.”

4. With regard to whatever worries you, not only accept the worst thing that could happen, but make it a point to quantify what the worst thing could be.

Very seldom will the worst consequence be anywhere near as bad as a cloud of “undefined consequences.” My father would tell me early on, when I was struggling and losing my shirt trying to get Parsons Technology going, “Well, Robert, if it doesn’t work, they can’t eat you.”

5. Focus on what you want to have happen.

Remember that old saying, “As you think, so shall you be.”

6. Take things a day at a time.

No matter how difficult your situation is, you can get through it if you don’t look too far into the future, and focus on the present moment. You can get through anything one day at a time.

7. Always be moving forward.

Never stop investing. Never stop improving. Never stop doing something new. The moment you stop improving your organization, it starts to die. Make it your goal to be better each and every day, in some small way. Remember the Japanese concept of Kaizen. Small daily improvements eventually result in huge advantages.

8. Be quick to decide.

Remember what General George S. Patton said: “A good plan violently executed today is far and away better than a perfect plan tomorrow.”

9. Measure everything of significance.

I swear this is true. Anything that is measured and watched, improves.

10. Anything that is not managed will deteriorate.

If you want to uncover problems you don’t know about, take a few moments and look closely at the areas you haven’t examined for a while. I guarantee you problems will be there.

11. Pay attention to your competitors, but pay more attention to what you’re doing.

When you look at your competitors, remember that everything looks perfect at a distance. Even the planet Earth, if you get far enough into space, looks like a peaceful place.

12. Never let anybody push you around.

In our society, with our laws and even playing field, you have just as much right to what you’re doing as anyone else, provided that what you’re doing is legal.

13. Never expect life to be fair.

Life isn’t fair. You make your own breaks. You’ll be doing good if the only meaning fair has to you, is something that you pay when you get on a bus (i.e., fare).

14. Solve your own problems.

You’ll find that by coming up with your own solutions, you’ll develop a competitive edge. Masura Ibuka, the co-founder of SONY, said it best: “You never succeed in technology, business, or anything by following the others.” There’s also an old Asian saying that I remind myself of frequently. It goes like this: “A wise man keeps his own counsel.”

15. Don’t take yourself too seriously.

Lighten up. Often, at least half of what we accomplish is due to luck. None of us are in control as much as we like to think we are.

16. There’s always a reason to smile.

Find it. After all, you’re really lucky just to be alive. Life is short. More and more, I agree with my little brother. He always reminds me: “We’re not here for a long time, we’re here for a good time!

Note: Tip to Perry Jonkheer for the list.

David Ricardo’s Golden Rules: Trend Following in the 1700s

David Ricardo (19 April 1772 – 11 September 1823) was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. According to an 1838 book, The Great Metropolis, Volume 2, Ricardo had certain golden rules:

“As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by a scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option when you can get it, Cut short your losses, Let your profits run on. By cutting short one’s losses, Mr. Ricardo meant that when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. And by letting one’s profits run on he meant, that when a member possessed stock, and prices were raising, he ought not to sell until prices had reached their highest, and were beginning again to fall. These are, indeed, golden rules, and may be applied with advantage to innumerable other transactions than those connected with the Stock Exchange.”

Said another way: trend following.

Read more.

Busted flat in Baton Rouge… waiting for a train

Not all trend followers are the same and not all stick to their rules.

A few years ago a young guy under the tutelage of a known and famed trend follower (not a Turtle in this example, but I know two Turtles who walked the plank so to speak) started a fund. He raised over several hundred million in assets under management. He was making good money, but the credit crisis started and for whatever reason this trader went from systematic trend following to discretionary day trading leaving fellow employees scratching their heads (can’t make this up). It did not end well. Firm is gone now. So what do we all do with this example? Is that a trend following failure or something else? Clearly, it is something else. I know quite a few examples like this. Do some money mangers get into trend following, raise $, get in over their head then start changing this or that because of some gut impulse… and go bust? Absolutely. Rules in this world are important.

Lessons? Manage risk, and the reward will follow. Ignore your process and that opening lyric from “Me and Bobby McGee”…will happen. In my book, there is as much to learn from the consistent trend following studs as there is to learn from the cons and quitters.

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