Trend Following. Ritholtz Barry

options because the stop loss creates a limited downside, and the continuation of the trend creates the large upside. This is why the phrase for this approach to trading is to cut losses and to let profits run. Of course, if trends continually fail to materialize, these limited losses can accumulate to large losses. This is also true for any option purchase strategy. For trend followers, the option premium is paid for after an unsuccessful trade is closed when a stop loss has been reached. The premium can also be paid after markets have moved a great deal, profits have been made, and a reversal causes a trailing stop to be hit, and some of the profits reversed.

President, Graham Capital Management 76

      In Patton, my favorite scene is when U.S. General George S. Patton has just spent weeks studying the writing of his German adversary Field Marshall Erwin Rommel and is crushing him in an epic tank battle in Tunisia. Patton, sensing victory as he peers onto the battlefield from his command post, growls, “Rommel, you magnificent bastard. I read your book!”

Paul Tudor Jones in George Soros’ The Alchemy of Finance

      Bull market babies don’t survive, they revert to the mean.

Michael Covel

      I began to realize that the big money must necessarily be in the big swing.

Jesse Livermore

      Many people would sooner die than think; in fact, they do so.

Bertrand Russell

      Among people who take the trouble to understand what the business is about instead of assuming it involves speculating on live cattle, it is readily understood.

Campbell & Company 77

      If you take emotion – would be, could be, should be – out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.

John W. Henry 78

      A trend is a trend is a trend. Gertrude Stein would have said if she were a trader, “Once you have a game plan, the differences are pretty idiosyncratic.”

Richard Dennis 79

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      Great Trend Followers

      Most of us don’t have the discipline to stay focused on a single goal for five, ten, or twenty years, giving up everything to bring it off, but that’s what’s necessary to become an Olympic champion, a world class surgeon, or a Kirov ballerina. Even then, of course, it may be all in vain. You may make a single mistake that wipes out all the work. It may ruin the sweet, lovable self you were at seventeen. That old adage is true: You can do anything in life; you just can’t do everything. That’s what Bacon meant when he said a wife and children were hostages to fortune. If you put them first, you probably won’t run the three-and-a-half-minute-mile, make your first $10 million, write the great American novel, or go around the world on a motorcycle. Such goals take complete dedication.

– Jim Rogers80

      The wise and most efficient way to understand trend following is not by only learning rules that make up the strategy, or by studying behavioral work, but by reviewing every last detail of the traders who practice it – Anthony Robbins modeling 101. However, many are reluctant to concede they might do better with mentoring or guidance – even if only from a book. Although they will sign up for a cooking or language class, and bet their money on social media avatars, they won’t take advantage of insights from those who have made fortunes. They prefer reinventing the wheel instead of modeling behavior from proven top performers. However, the evidence shows modeling is critical for trend following success.

      Ultimately, I’ve also come to realize through nearly 20 years of research if you take trend following performance data seriously, you make a choice. You can accept the data as fact, make an honest assessment of yourself and your approach to making money, and make a commitment to change. Or you can pretend the performance of trend following traders doesn’t exist and stay on passive indexing autopilot while waiting for the inevitable correction.

      Author Tom Friedman sees the immense benefits in thinking wide. He knows the first step to the contrarian philosophy is that of a generalist:

      The great strategists of the past kept forests as well as the trees in view. They were generalists, and they operated from an ecological perspective. They understood the world is a web, in which adjustments made here are bound to have effects over there – that everything is interconnected. Where, though, might one find generalists today?.. The dominant trend within universities and the think tanks is toward ever-narrower specialization: a higher premium is placed on functioning deeply within a single field than broadly across several. And yet without some awareness of the whole – without some sense of how means converge to accomplish or to frustrate ends – there can be no strategy. And without strategy, there is only drift.81

      The traders I have profiled in Trend Following see the playing field as generalists. They see what is important and cut the extraneous. Charles Faulkner notes you must also know you:

      Being able to trade your system instead of your psychology means separating yourself from your trading. This can begin with your language. “I’m in the trading business” and “I work as a trader” are very different from “I’m a trader” or “I own a few stocks and bonds” (from a major East Coast speculator). The market wizards I’ve met seem to live by William Blake’s phrase, “I must make my own system or be enslaved by another’s.” They have made their own systems – in their trading and in their lives and in their language. They don’t allow others to define them or their terms. And they are sometimes considered abrupt, difficult, iconoclastic, or full of themselves as a result. And they know the greater truth – they are themselves and they know what works for them.

      David Harding is a trend following trader not originally profiled in my first edition. He has established himself as a leader of a new generation of trend followers which includes Leda Braga, Cliff Asness, Martin Lueck, Anthony Todd, Svante Bergström, Gerard van Vliet, Ewan Kirk, Martin Estlander, Zbigniew Hermaszewski, Natasha Reeve-Gray, and Jean-Philippe Bouchaud.

      After Harding, I reintroduce all the legendary trend following pros. They provide timeless insights, motivation and lessons for all aspiring trend following traders – from the brand new with zero experience to professionals with perhaps all the wrong experience. There are fantastic lessons from the superstar names, no doubt, but 100 years from now those names will be different. The names always change, but trend following strategy endures.

      David Harding

      David Harding has had rock and roll success as a trend following trader. Today, his trend following fund for clients exceeds $30 billion in assets, give or take a billion or two to the upside. He had a long stretch where his firm made 20 percent a year, but has dropped some with his explosion of assets under management.

Born in London and reared in Oxfordshire, Harding was always interested in investing – a result of his father’s influence, a horticulturalist who enjoyed betting on the markets. His mother by comparison was a French teacher. As a young man he had a natural inclination for science and quickly found a way to put the talent to use. Early in his career he took a job at Sabre Fund Management where he designed trading systems. Soon thereafter he met Michael Adam and Martin Lueck. The trio went on to launch Adam, Harding, and Lueck (AHL) a trend following firm managing money for clients. In a few years the Man Group bought AHL out and built its trend following firm and systems into a monster with billions under management.82 Harding, while wealthy from the sale, knew much of Man Group’s success was built around his trading systems. But he wanted more than to rest on his buyout winnings, and over time built his new firm Winton Capital into a juggernaut. All that success comes with a certain philosophical

76

Ibid.

77

Bruce Cleland, “Campbell and Company,” Futures (March 2004): 72.

78

David Whitford, “Why Owning the Boston Red Sox Is Like Running a Successful Hedge Fund,” Fortune Small Business (October 25, 2003).

79

“The Whizkid of Futures Trading,” Businessweek, December 6, 1982, 102.

80

Jim Rogers, Investment Biker (New York: Random House, 1994).

81

Thomas Friedman, The Lexus and the Olive Tree (New York: Farrar, Straus and Giroux, 1999).

82

Leah McGrath Goodman, Trader Monthly, www.traderdaily.com/magazine/article/17115.html.