- The Market
- Winning and Losing
- Investor v. Trader: How Do You See the World?
- Fundamental v. Technical: What Kind of Trader Are You?
- Discretionary v. Mechanical: How Do You Decide?
- Has Trend Following Changed?
- Trend Following Modus Operandi: Follow Price
- Follow the Trend
- Handling Losses
- Key Points
Has Trend Following Changed?
There are plenty of people who ignore Trend Following's tremendous track record and argue that it is outdated or inferior or that it plain doesn't work.
The four most expensive words in the English language are "this time it's different."
Sir John Templeton
"Has Trend Following changed?" was the topic of a panel at the Managed Fund Association's Network 2001 conference. Dr. Patrick L. Welton, CEO and Chairman of Welton Investment Corporation, said that there is no evidence that Trend Following has changed. In order to prove this fact, he constructed 120 trend-following models. Some were reversal-based, and others were not. Some were breakout-based on price with others on volatility and band-style breakouts. The average holding periods ranged from two weeks to one year. The results gave almost identical performance characteristics in periods covering the late 1980s, early 1990s, and late 1990s.
Welton also addressed the misconception that the sources of return for Trend Following had changed, saying that there was no evidence to support that perception. He pointed out that starting from first principles, it was a fact that the source of return for Trend Following resulted from sustained market price movements. Human reaction to such events, and the stream of information describing them, takes time and runs its course unpredictably. Welton went on to state that the resulting magnitude and rate of change of price could not be reliably forecast. This is the precise reason why Trend Following works.24
While conceding tacitly or explicitly that over the long run daily price movements are serially independent (move randomly) technical analysts focus on recurring short term patterns and trends. They are like surfboard riders, who study the movements of the waves, not in order to understand why they behave as they do, but simply in order to be on hand whenever they surge, to catch them at their crest, or as soon thereafter as possible to ride them as far as they possible can, and to dissemble before they change direction.
Morton S. Baratz25
Burt Kozloff, a consultant in the hedge fund industry, also confronted skeptics. Here is an excerpt from a presentation he gave:
"In February 1985, on a tour of Germany sponsored by the Deutsche Terminborse, several advisors and pool operators were making a presentation to a group of German institutional investors. Among them were two trend-based traders, Campbell & Co. and John W. Henry & Co. During the question-and-answer period, one man stood and proclaimed: 'But isn't it true that Trend Following is dead?' At this point, the moderator asked that slides displaying the performance histories for Campbell and Henry be displayed again. The moderator marched through the declines, saying: 'Here's the first obituary for trend-based trading. Here's the next one . . . and the next but these traders today are at new highs, and they consistently decline to honor the tombstones that skeptics keep erecting every time there's a losing period.' Campbell and JWH have made their investors hundreds of millions of dollars since that time. It might, therefore, be a mistake to write yet another series of obituaries."26
A new Trend Following obituary will be written every few years despite the incredible amounts of money made by its practitioners. Perplexed at Wall Street's lack of acceptance, John W. Henry once responded to Trend Following critics:
"How can someone buy high and short low and be successful for two decades unless the underlying nature of markets is to trend? On the other hand, I've seen year-after-year, brilliant men buying low and selling high for a while successfully and then going broke because they thought they understood why a certain investment instrument had to perform in accordance with their personal logic."27
Trend followers generally seem to be oblivious to those who question the validity of their strategy. Why spend energy constantly defending yourself when you are producing monster returns year after year?
By honest I don't mean that you only tell what's true. But you make clear the entire situation. You make clear all the information that is required for somebody else who is intelligent to make up their mind.