William Eckhardt, the great trend-following trader, has spoken forcefully about the idea of not having a memory in your trading:
“Suppose two traders, A and B, are alike in most respects except the amount of money they have. Suppose A has 10 per cent less money but he initiates a trade first. He gets in earlier than B does. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn’t know what his initiation price is.”
My guest today is Francisco Vaca. Vaca can be called a second generation turtle trader. He worked with Richard Dennis at C & D Commodities, and for the last 15 years has been closely associated with Paul Rabar. He is now the Co-Chief Investment Officer at Rabar Market Research. Before he became a trader, Vaca was a particle physicist and worked at the famous Fermi lab. This is not an insignificant fact, as his background in mathematics and statistics became very useful in his career as a trader.
The topic is Trend Following.
In this episode of Trend Following Radio we discuss:
The importance of distinguishing between long term and short term track records
“Alpha” and “beta” trading strategies
How the holding period length affects the risk-reward profile and return streaks
The benefits of diversification across different holding times
Using high frequency trading technology in long term trend following
How correlations are often misinterpreted
Knowing the limitations of your tools
“The best performing system historically is not necessarily the best system going forward” – Francisco Vaca