Saturday, April 02, 2016

Much ado about nothing

Well that's the first quarter wrapped up for 2016. And, as the metrics show, nothing much has happened in terms of performance. Looking at the monthly returns over the last year or so in particular, these losing months have been kept as small as possible. And, even after a period of non-performance, the returns on all closed trades is about 5R off of all time equity highs. Which, in the longer-term scheme of things, is nothing. One relatively decent trend will cover that.

As a comparison, below is a screenshot of the published monthly returns for Mark J Walsh & Co. While he was not one of the participants in the Turtles experiment from the 1980's, Walsh was an associate of Richard Dennis. You can view the monthly performance of other trend followers (including some of the former Turtles) here


You can see here that there are many, many months where there are negative returns generated, some of which are in double digits. 

Successful CTA's like these do not look at their returns over a small period of a few months - they have the knowledge of 20+ years performance to rely on. So, even when MJW & Co incurred three years of negative returns like those shown above from 2011 - 2013, and also for the first half of 2014, they would have the belief and discipline to stick to what they know. That sort of drawdown falls within their expectations. 

Given that trend followers typically have a win rate between 30% - 40%, they have an expectation that the next trade they will put on will be a loser. But they also know there is a possibility that the next trade may be a big winner.

How many individual traders that you know would have the same mindset, or level of expectations?

Trend followers should expect to suffer runs of losses, of drawdowns, or phases of non-performance. But they also know that things can quickly change. Look at MJW's returns again. What happened in the latter part of 2014? Crude oil took off to the downside. Other trend followers' performance picked up around the same time, and that one trend helped turn what was a losing year into a winning one.

Bill Dunn's firm had three consecutive years of double digit losses in 2003-2005. But they kept going. Since then, nine of the next ten years were profitable.

How many individual traders would have the same confidence of belief in their approach? Would they have given up after losing for three years in a row? I know of people who have given up and ditched a robust, proven method after half a dozen losing trades or a few weeks.

I've talked in the past about the horrendous run of losing trades and drawdown I went through in 2014. Yes it was frustrating, but it was within normal expectations. Look at the maximum drawdowns (WDD) suffered by those funds as a comparison. Why should I be any different? 

It didn't feel great posting loss after loss up on here, but that is the reality of trend following. And, by remaining patient and disciplined, I was able to recover those losses and get back to new all-time equity highs in a few months. So may be you can now understand why being only 5R off all-time highs, despite a lengthy phase of little or no gains, doesn't worry me in the slightest.

Comparing returns of funds like these are a great educational resource and inspiration to individual trend followers like myself. While all these funds may use different timeframes or have different entry and exit parameters, and may trade different markets, they all work on the same premise - they look to capture trends, control risk, cut losses and let profits run.

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