Systematic Trend Following Is Not For Small Traders

One of the most common suggestions in the world of futures trading is that to succeed, you should use a trend following system mechanics and trade with discipline. Many advocates of wisdom to the success of some of the big names among trading advisors past and present materials, as John W. Henry, who now owns the Boston Red Sox. Several books have been written on the subject of trend following systems in the last decade. The trading system vendors are constantly developing new systems for sale to the public of hundreds, even thousands of dollars.

Unfortunately, the fact is that the small trader simply can not afford to negotiate a mechanical trend monitoring of the futures markets. Why? The answer is simple ... impressions inherent in the negotiation of a mechanical system are simply too large for the small trader to handle emotionally and psychologically. Consider this fact ... during his career as a commodities trading that uses a systematic trend following strategy, Bill Dunn Dunn Capital Management, had runs of more than 30% at least seven times during a 40-year career, and two of these cases involved more sweepstakes 50%. During this period, the compound annual return was about 18%.

While the annual rate of return is Dunn Capital is certainly impressive, most investors are not attracted by the prices. A tax of 50% is equivalent to seeing a stock you bought at $ 100 drops to $ 50. This type of volatility is actually similar to how Apple's stock has performed since 1990, with similar yields, but how many people have owned Apple stock since 1990?

Most advocates systematic monitoring time trend suggests that losses are more than the cost of doing business. They compare systematic trend after a casino, which lasts "edge" long and its customers. This is the case, but it is also clear that the trend following systems can go through long periods of significant underperformance relative to other assets. Since 2009, this has been the case. Apart from 2010, the last four years have been very difficult for most trend followers in the futures markets.

In fact, you could say that, apart from the years 2008 and 2010, the trend of these performances were very poor during the last decade from 2004. For example, John W. Henry actually went out of business due to volatile returns over the last decade. Some suggest that this was due to his entry into the world of Major League Baseball. However, this behavior is also reflected in the decline in assets managed by former Turtle R. Jerry Parker and Chesapeake Capital Management. Assets under management in the Chesapeake futures peaked at more than $ 1.5 billion in 2007, and now stands at just over $ 300 million. It is based on the historical performance shown Autumngold.com.

Despite this recent trend followers in performance, developers indicate that it is the right time to start investing in this type of program. This is probably the case. The poor performance of trend followers is often followed by periods of good performance, and this cycle will continue. However, systematic trend following is still not the solution for the small investor or trader who wants to trade for their own account, and that will remain big draws.

Most advocates systematic monitoring trend then return to the merchant to handle business psychologists then suggest that the trader must learn to separate emotionally from their business to succeed. In other words, they have to learn to accept samples of 30% or more simply as part of the process of wealth creation.

I remember parallels with the world of golf. It is not uncommon for a professional golfer strives to keep your card, or difficult to perform well on Sunday afternoon when they are running, hire a sports psychologist. I can not think of the players who then become dominant players. The best players hate losing, and never separated emotionally.

Take the most recent example. Phil Mickelson has won the British Open after a devastating defeat at the U.S. Open only a month before. He could barely get out of bed for two days after the loss, but recovered and won successive weekends Scottish Open and British Open. Meanwhile, Lee Westwood, who has never won a major golf championship, blew another chance to win the British Open and then suggested that "it is only a game." He has never won a major after 62 attempts. I think that you will never win a major tournament with this attitude.

Traders, as golfers are constantly in search of the Holy Grail. What many traders expect to find a mechanical trading system that takes all the decisions for them and churns out profits month after month. Golfers are often in search of this golf club training aid, mental thought, or a new market for your golf swing to become players scratch. I find it funny when a 20-handicap golfer becomes mental golf tips as if translated his terrible golf swing on a ball machine impressive.

Another problem with mechanical trend following systems is that they have very different results for commercial churn. This is why most advisors commodity trading using the doctrine of the trend following funds manage multiple systems to address the equity curve. I recently tried two different trading systems in a basket of currency futures contracts. It was a triple moving average system, and the other was a standard breakout strategy. I tested on data from 1977 and found eleven years a system makes money and other money actually lost. In many other years, the results vary considerably, although both made or lost money in a given year.

In other words, there is a control system mechanical trend works best, and that's a big reason for the small trader has a difficult time negotiating a mechanical system. Once a withdrawal occurs, the trader is moved to another system that has been shown to have better results when they are subject to a draw in the other system.

Yet this state of mind, what is the answer? Discretion following the trend! Trend following discretionary simply means sharing a strategy that takes advantage of trends, but not always followed. In other words, there may be a basic input and output signals, but the dealer can pass on some trades, which has a set of discretionary rules would mean that businesses have a lower probability of success. The discretionary trader is not affected by losing some trends, but is concerned about the preservation of capital and waiting for the best opportunities.

One of the biggest myths in the world of futures trading around the legend of the turtles. Turtles are a group of operators trained by legendary traders Richard Dennis and William Eckhardt. Many continued to have a successful career as commodity trading advisors, including R. Jerry previous Parker. The myth is that these traders have received mechanical trading system futures market. In fact, only been given a set of rules, including mechanical entry and exit rules and a set of discretionary rules. These strategies were intended to be placed mechanically. Dennis individual traders even want to show their own style of trading. This is why the actions of this group of traders in the program varied considerably, so it has even been suggested that some traders were higher trading system (which is another myth that traders in the program really Dennis accused of doing this ).

Here's the bottom line ... Successful negotiation requires hard work, discipline and hard work regularly. Commercial success has nothing to do with the discipline to follow a system of mechanical trend following as suggested by many authors and traders. Successful negotiation is simply having a set of beliefs, an essential if you want strategy and learn to overcome this basic strategy through the use of discretion by learning to understand the behavior of prices and market psychology. Although legendary hedge fund manager George Soros is clearly swinging for the fences and capture major changes in your business, he clearly did not negotiate a mechanical tracking trends. If you are a small trader or investor, you should not.