If you've visited this blog before you've seen the carousel of books to the left of the screen. Two of those books talk about the Turtle Traders, traders who were taught a trend following system by a couple of the most successful commodities futures traders around at the time. I remember when the Turtle Traders were a big topic of speculation in the world of trading, but it wasn't until Curtis Faith's book came out that real, broad based interest began in what trend following could do. The concept of trend following is a simple one. You follow the price of a certain commodity, future, stock, option or currency, and when it exceeds its high or low of so many days, you enter. Your exit strategy is a bit trickier (as it always is) and most trend following systems with some type of move the other way such as reaching the high of a shorter period of time than you used to enter, or a move of a certain percentage of the width of the band between the high and low of a certain period, or the move in the opposite direction of some multiple of the Average True Range. Regardless of what exit you choose, the basic idea is you hop on the trend when it begins, get off a bit after it ends, and take your profit from the middle of the move.
As you might imagine, deciding when the trend begins is the first hurdle. As more traders have taken to trend following systems, it seems as if the length of time one has to wait until entry increases. When the Turtles began their trading the length of time for the look back on highs and lows for entry was 20 days (or so the story is told). The length of time I hear a lot now is 40 days. My system uses a 32 day look back for entry and 20 days for exits. I use a bit of an offset for both entry and exit so I get in a bit earlier and out a bit later. My trading system has returned $577,452 on a starting balance of $100,000 this year. Now this is a much larger return than I've ever had before. I had a 17% loss last year and a whopping 65% loss the year before, so while the gain this year is huge, it must be viewed in light of the stomach churning losses of the previous two years.
The five year average return on the account would have been 52%/yr, but I recharge the account up to $100k at the end of each year if I have a losing year, and take out enough to bring the account down to $100k if I have a winning year. The ten year return would have been 132%/yr. Both calculations are before taxes. I point this out only to illustrate that trend following works, but that you have to reconcile yourself to some nail biting years. Big money cannot be made if you fear losing your account. You must back test your system enough to be able to trust it, then make your trades without emotion. Don't even think about what the return is until year's end. If you are up today, you could still be down on 12/31, so don't get cocky. Conversely, if you are down now, a run up in crude oil could bring you back by years end. That is how trend following works. Big swings, but with a generally upward move in the equity curve.
I would encourage anyone to play with trend trading. It will make you money if you can handle the moves.
Happy Trading!
As you might imagine, deciding when the trend begins is the first hurdle. As more traders have taken to trend following systems, it seems as if the length of time one has to wait until entry increases. When the Turtles began their trading the length of time for the look back on highs and lows for entry was 20 days (or so the story is told). The length of time I hear a lot now is 40 days. My system uses a 32 day look back for entry and 20 days for exits. I use a bit of an offset for both entry and exit so I get in a bit earlier and out a bit later. My trading system has returned $577,452 on a starting balance of $100,000 this year. Now this is a much larger return than I've ever had before. I had a 17% loss last year and a whopping 65% loss the year before, so while the gain this year is huge, it must be viewed in light of the stomach churning losses of the previous two years.
The five year average return on the account would have been 52%/yr, but I recharge the account up to $100k at the end of each year if I have a losing year, and take out enough to bring the account down to $100k if I have a winning year. The ten year return would have been 132%/yr. Both calculations are before taxes. I point this out only to illustrate that trend following works, but that you have to reconcile yourself to some nail biting years. Big money cannot be made if you fear losing your account. You must back test your system enough to be able to trust it, then make your trades without emotion. Don't even think about what the return is until year's end. If you are up today, you could still be down on 12/31, so don't get cocky. Conversely, if you are down now, a run up in crude oil could bring you back by years end. That is how trend following works. Big swings, but with a generally upward move in the equity curve.
I would encourage anyone to play with trend trading. It will make you money if you can handle the moves.
Happy Trading!
