This trading strategy beats trying to predict the market
Change is Constant
David Mackay
published
Extraordinary Popular Delusions and the Madness of Crowds in 1841. His
famous essay chronicles a mania for exotic tulip bulbs in 17th Century Holland,
but the example still resonates. That crowd made a seemingly infinite hunger for
the flower into a speculation bubble.
Anytime there’s a
bubble or a major move, traditional investors reevaluate. Whether their hopes
are dashed or their wildest dreams are imagined, they still ask: What’s next?
Never satisfied. Everyone is too ready to board the roller coaster again, front
or back, up or down. Which is why when J.P. Morgan was asked what the market
would do, he replied: It will fluctuate.
One view on handling those fluctuations from
Future Magazine regarding Dunn Capital:
Bill Dunn and Pierre Tullier, not
surprisingly, think long term, and they have no intention of altering their
basic strategy despite a growing industry clamor for minimal drawdown,
money-market style commodity management. "We make a lot more money trading at
the level we do," Tullier says. "The trade-off is volatility, but if it doesn’t
cause you to perish, then you’re better off in the long run." The basic DTS
strategy, intact since 1974, is a long-term, pure reversal, breakout,
trend-following system that trades three to five times per year (per market) on
average. (It may ride a good trend for as long 18 months or exit in two weeks if
the market goes against it.) "I felt there were very definite economic trends
that were established from knowledge and the ability to know what events meant,"
Dunn says. "I was looking for a way to participate in (those) major trends when
they occurred, even though they were unexpected."
But what about change? How do you prepare for
that?
It’s probably the question we get asked the most,
and it’s definitely simple to answer: Have the markets changed? No. Markets
behave the same as they did 300 hundred years ago. They are the same today
because they always change. If you have a trading system that’s sound, meaning
its principles are designed to adapt, you can take advantage of market changes
and make money. Changes in markets are no different than changes in the business
world, or in life. They will not impact negatively on you if your strategy for
handling them is based on reality, flexibility and responsibility for making
your own decisions.
Consider the wisdom of John W. Henry owner of the
Boston Red Sox and a legend in the field of trend following:
If you have a valid basic philosophy, the
fact that things change turns out to be a benefit. At least you can survive. At
the very least, you will survive over the long term. But if you don’t have a
valid basic philosophy, you won’t be successful because change will eventually
kill you. I knew I could not predict anything, and that is why we decided to
follow trends, and that is why we’ve been so successful. We simply follow
trends. No matter how ridiculous those trends appear to be at the beginning, and
no matter how extended or how irrational they seem at the end, we follow trends.
Still others are unconvinced and argue that
technology erases any trading edge, thereby changing the markets. Computers
don’t erase edge. For every trader with a computer program saying buy, there are
nine other traders with computer programs saying sell. No matter what you do,
markets go through different stages: accumulation, run up, distribution and run
down.
The Universal Chart; No Change
Some people focus
on the past results of a trading system to gauge its success. Others only think
about what happened last month. Both are wrong.
A great trend following system, adapts to change.
Trend Following successfully trades the charts below. Moreover, these 3 charts
have no dates or times on them. Why? That information couldn’t matter less.
Neither is there any mention of what market is being examined.
Why no specific information on the charts? Why
doesn’t it matter? Markets trend. They have trended for hundreds of years. If
you know markets trend, and the price is the key, why does it matter what market
the chart even represents?
Keith Campbell one of the best all time trend
followers has said:
Nothing has changed during the 20(+) years
we’ve been managing money. Government regulation and intervention have been,
are, and will continue to be present for as long as society needs rules by which
to live. Today’s governmental intervention or decree is tomorrow’s opportunity.
For example, governments often act in the same way that cartels act. Easily the
most dominant and effective cartel has been OPEC, and even OPEC has been unable
to create an ideal world from the standpoint of pricing its product. Free
markets will always find their own means of price discovery.
"Finding their own means of price discovery" is a
loaded statement for most people. It means you can’t predict or wish a move to
happen. All you can do is follow the price and follow the trend.
Michael Covel
Michael W. Covel is the founder and President
of Trend Following. A researcher of the most successful Trend Following
investment managers, he has been in the alternative investments industry
consulting on Trend Following to individual traders, hedge funds and banks for
ten years. His best selling book, Trend Following: How Great Traders Make
Millions in Up or Down Markets (Prentice Hall, May, 2004) is a complete and
concise guide to trend following. It includes interviews with great trend
followers who have won millions if not billions in the market. The trading world
has embraced the book with endorsements from Van K. Tharp, John Mauldin, Ed
Seykota and many more. Trend Following is now in its fifth printing, and is
currently available in a Japanese translation with Chinese, German, French,
Korean and Russian translations soon to follow. Teaching and sharing unique
insights about Trend Following trading and alternative investments has earned
Mr. Covel respect as a rational and logical voice in uncertain times. Mr. Covel
also writes for numerous industry publications including Your Trading Edge,
Stocks, Futures and Options Magazine and International Petroleum Finance and is
consistently quoted and interviewed by a variety of financial publications.
Mr. Covel is also Managing Editor at
TurtleTrader.com, the leading Trend
Following news and commentary resource since 1996. Thousands of visitors from
more than 70 countries as well as hundreds of trading professionals engaged in
years of debate and interchange making the site the rich archive of trading
information, data and opinion that it continues to be today. TurtleTrader, one
of the largest & strongest trading community on the web with over 7.5 million
unique visitors since its inception, also functions as a resource center for the
Trend Following Educational Course.