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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.

Peace,
[Name]

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.

“Why do people settle for mediocrity?”

Feedback in:

Michael,

First off, as an avid listener to your podcast I would like to thank you for the free content you put out to spread the trend following ideology. I have benefited from your content greatly, and know other like minded people have benefited as well.

As a recent graduate with an engineering degree I had a lot of trouble carrying out a buy and hold (hope) type investment strategy. It was a big mental conflict listening to the advice of financial advisors that recommended a strategy with mediocre returns and excess risk. Why does the media, efficient market theorist disagree with the that mentality hard work = results when it comes to the markets? Why do people settle for mediocrity?

Being relatively new to investing, and being the results driven person I am, after hours/days of researching different investment strategies, trend following caught my eye. A system that relies on the hard numbers (price) rather than opinions and blind predictions is exactly what I was looking for. Despite the poor timing for me to adapt a trend following type strategy (sideways market), I am no less confident in my strategy than the day I started, however this doesn’t mean there isn’t room for improvement.

As someone who exclusively trades stocks/bonds/etfs which of your books would you recommend for me to improve upon my system? I am already aware of the many trend following principles the turtles have used, i.e. position sizing, entry, exit…

Thanks again,
[Name]

I would try them all.

Recreating the Turtle Experiement in the Information Age

A recent interchange:

Listener: As you know most new Macs don’t have DVD drives. Do you have a download to buy Broke?

Covel: It’s on Amazon and iTunes.

Listener: Thanks. And how about the DVD you send to people who sign up for your newsletter?

Covel: Here.

Listener: Thank you.

A few days later the same listener writes:

Listener: Michael, one of the best trades I make is listening to your podcast at night instead of going out to bars with my friends that don’t understand the value of time. I’ve had email conversations with Jerry Parker, [name] and a response from Salem Abraham. Wondering if you have any suggestions on how I may make a trade with them to take me under their wing and teach me as Richard Dennis taught Jerry and other Turtles? At 26-years old I don’t have as much to offer a billionaire as the value they’d be adding to my life and future income [is far greater].

Covel: No secrets on meeting people. Do read [Seth] Godin book, “Linchpin“. But you need to think carefully about the time needed to become an employee versus just being the boss from the beginning. The Turtle experiment will never be repeated as it was.

Listener: I’ll order it now. I’ve always been my own boss. I don’t want to work for them, I want to be mentored by them. But I can’t ask for value without offering them value. You know them. What could I offer them in return for mentorship? Never say never. You wouldn’t be where you are if you believed in never. Doesn’t mean we cant orchestrate a different version of the experiment.

Covel: DIY. The time wasted chasing the boss, or mentor, can be great. Much of the information and insights and mentoring you want is in front of you. But you want something else–so you don’t see it.

Listener: Your podcast is nothing but people who believed in themselves and didn’t listen to others when they said they couldn’t do something, including yourself. Really surprised you are so quick to discourage me from seeking mentorship. I know the way the experiment was done is extraordinary and rare. Doesn’t mean we can’t figure something out that could persuade Jerry or Salem or at least intrigue them.

Covel: You are not the only one to contact all these great traders in the day of the information age. They only have so much time. Best advice: DIY.

Ep. 332: Brian Proctor Interview with Michael Covel on Trend Following Radio


Michael Covel speaks with Brian Proctor on today’s podcast. Proctor is an original TurtleTrader trained by Richard Dennis and Bill Eckhardt and today is a Managing Director at EMC Capital. He began his futures career in 1982, with experience at both the Chicago Mercantile Exchange and Chicago Board of Trade. Proctor was a participant in the renowned Turtle Program, and managed all trading operations at C&D Commodities through 2000. Covel and Proctor discuss Proctor’s first trading moments and the Turtle program; Proctor’s view on Liz Cheval, what she brought to his firm, and why she’s still an integral part of EMC today; how trend following strategies have continued to excel over the years; diversification and the Swiss franc; black swans and how the impossible can and does happen; and Bill Eckhardt’s influence. For more information on Brian Proctor, visit www.emccta.com.

Listen to this episode:

Your Neighbor Might Not Be Your Best Gauge

Feedback:

Mike, I’m very happy to correspond with you. I have read 80% of all trades are losers. Do you have statical data regarding the success of traders after having taken [your training and applying your systems]? Thank you, Terry

Thanks for the question.

I can teach clients, but I can’t force anyone to disclose anything or track their brokerage accounts. Frankly, I don’t want to force anyone to do anything. You can read success stories from our products here, but ultimately this comes down to a client sticking with a trend trading system.

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