Trend followers are not trend predictors
Trend Followers Are Not Trend Predictors
Some have long floated the idea that trends are actually produced by the trend followers themselves all jumping into a given market. Keith Campbell has offered:
We are trend followers, not trend generators. At the beginning or end of a major trend we may provide a little bump or a minor goose, but it will be an extremely superficial, temporary effect…While the trading systems are generically the same, in point of trading fact, the parameters are different. If they were exactly the same, then yes, the impact would be devastating, but they’re not.
Others still focus on the idea of using fundamentals for prediction. Kevin Bruce of Strategic Capital Corporation has offered:
I could not analyze 20 markets fundamentally and make money. One of the reasons
(trend following) works is because you don’t try to outthink it. You are a trend follower, not a trend predictor.
Bruce’s wisdom can be confusing to accept. Consider recent email feedback across my screen:
How can one tell how the market is going to move? Fundamentals often turn out to be media hype or stale data. Prices fluctuate due to underlying economic activities that we only learn about in hindsight. I have lost all faith in buy-and-hold strategies, Gann lines, Stochastics, and the rest of the nonsense pontificated by the pundits. I know you guys talk about money management, and I agree it’s vital. In short, what are there about trends that is even remotely predictable? There are so many variables, most of them hidden. Brokers who spend all day staring at computer screens, talking to companies, researching technical and fundamental data appear to have talent only in separating you from your money and building up their personal portfolio with commissions. If Trend Following works, it’s because it can predict the trend. Sure, the trend is your friend until the end, but how do you find a good trend to ride?
How can you tell how the market is going to move? You can’t. Trend Followers respond to market moves. They do not predict them. In short, what is there about trends that is even remotely predictable? Nothing. Trend Followers react, they don’t predict. Trend Following is an entirely different way to view the market than what you see on CNBC. If Trend Following works, it’s because it can predict the trend? Again, there is absolutely no prediction involved.
The skeptics abound. They figure there must be a catch with trend following. Another reader writes:
John Henry has said “I began believing in March that we were going to have a major move in the dollar, so we had some fairly big positions.” Doesn’t sound like a trend follower does he? At least from what I understand from reading at your site. Exactly where does belief fit into Trend Following?
Don’t take one quote out of context and draw some conclusion that Henry is a belief trader. Nonsense. Belief or prediction is not part of Henry or any good Trend Follower. From Henry’s methodology statement:
What we don’t try to do is predict trends. While confirmation of a trend’s existence is sought through a variety of statistical measures, no one can know a trend’s beginning or end until it becomes a matter of historical record. Trending markets can experience fluctuations in price which may or may not signal fundamental shifts in direction. Consequently, we cannot expect to enter a market at the precise moment a bottom is hit, nor will we exit a market at the exact top.
How does one put his words into daily action? James O. Rohrbach sends out regular emails about his trend trading model:
“I know there is an urge to anticipate a Signal and act before the actual Signal occurs. I also know that anticipating can be costly and in the whole scheme of things, one day does not matter. An example just occurred with the NYSE Buy Signal. It was issued on 11-7-05 after the close, so the first time we could buy in was 11-8-05. In this instance the market dropped slightly on 11-8-05 making prices slightly lower than they were the day before. So it worked out to our advantage. Try not to get too excited about jumping the gun. In the long run it doesn’t pay. You have to become a relaxed investor and just become automatic about getting in and getting out of the stock market. Easier said than done, but you will reach the final stage of investment maturity when you strip your emotions out of your decision process. I don’t even give it a second thought. When I get a buy signal, I buy and when I get a sell signal, I sell. That’s what I mean when I say Keep It Simple. Emotions are what makes investing difficult for most people.”
Can you keep it that simple? Can you resist desires to predict?
Christian Baha’s Superfund breaks the debate down even further:
“There is no system which can immediately and accurately identify the difference between a short term fluctuation and a big, long-term, profitable trend. From time to time, the trading system enters trends, which despite promising signals, reverse very fast. These erroneous signals may cause losses if they occur cumulatively. In so-called sideways periods, when no clear trends can be identified, erroneous signals occur more often. As hardly any clear trends develop during such sideway movements, it is difficult to yield profits in these periods.”
Most of Wall Street expresses surprise with any decline in any market. Trend followers on the other hand know ups and downs are part of the game. They honestly talk about declines before they ever happen. What do you want? Honest talk about the ups and downs? Or would you rather listen to Wall Street’s unfounded predictions and cries of “what happened?” whenever there is a decline?
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.