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This chapter is from the book


Ed Seykota once told me a story about being in Bermuda with a new trader who wanted to learn the “secrets.” “Just give me the quick-and-dirty version of your magical trading secrets,” the neophyte said. Seykota took the new trader out to the beach. They stood there watching the waves break against the shoreline. The neophyte asked, “What’s your point?” Seykota said, “Go down to the shoreline where the waves break. Now begin to time them. Run out with the waves as they recede and run in as the waves come in. Can you see how you could get into rhythm with the waves? You follow the waves out and you follow them in. You just follow their lead.”

In my search for the facts about trend following, it became clear that its basic tenets, its philosophical underpinnings, are relevant not only to trading, but to our lives in general, from business to personal relationships. I also found in my conversations with the old pro trend followers that trend following works best when pursued with unbridled passion.

How important is passion? Author Brett Steenbarger puts passion into perspective:

  • “Find your passion: the work that stimulates, fascinates, and endlessly challenges you. Identify what you find meaningful and rewarding, and pour yourself into it. If your passion happens to be the markets, you will find the fortitude to outlast your learning curve and to develop the mastery needed to become a professional. If your passion is not the markets, then invest your funds with someone who possesses an objective track record and whose investment aims match your own. Then go forth and pour yourself into those facets of life that will keep you springing out of bed each morning, eager to face each day.”38

While assembling Trend Following, it became clear that when used within the context of passion, the term “trend following” could also be substituted throughout for other activities in life. This insight crystallized with me while rereading a passage from a 1938 book on creative writing by Brenda Ueland:

  • “Whenever I say writing in this book, I also mean anything that you love and want to do or to make. It may be a six-act tragedy in blank verse, it may be dressmaking or acrobatics, or inventing a new system of double entry accounting...but you must be sure that your imagination and love are behind it, that you are not working just from grim resolution, i.e., to impress people.”39

Trend followers I met don’t seem to trade with grim resolve or with an intention to impress others. They are playing the game to win and enjoying every moment of it. Like other high-level performers, such as professional athletes and world-class musicians, they understand how critical it is to maintain a winning attitude for success. And as Larry Hite reminded, good trend traders ask themselves straightforward questions:

  • “The first question you have to ask yourself: ‘who are you?’ I’m not kidding. And don’t look at your driver’s license! But what you got to say to yourself: ‘what am I comfortable doing?’ Am I an arbitrager? Am I a short-term trader? ...it is really important that you understand who you are and what you want to do. The next thing you have to ask yourself, one of the real details, ‘what are you going to do?’ What are you going to do exactly? What has to be done? Is it hard to you? Is it easy? Do you have the materials to do it? One of the great things about the market is the markets don’t care about you. The market doesn’t care what color you are. The markets don’t care if you are short or tall. They don’t care about anything. They don’t care whether you leave or stay. The last question you have to ask yourself: ‘what follows?’ You have to ask yourself, ‘if I do this and it works, where am I? What have I got?’ Now what I’ve said may really sound like it’s pretty simple and common sense, [but think about the failed hedge fund Long Term Capital Management]...those were some very, very smart people [Nobel Prize winners] who did some pretty stupid things. And they did it because they didn’t ask themselves the basic questions.”
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